Saudi Arabia reconsiders Aramco share sale
Saudi Arabia is reconsidering plans for an international listing of shares in its state oil company Saudi Aramco, in favour of a private share sale. John Murray Brown asks the FT’s oil and gas correspondent Anjli Raval, and Alan Livsey, a Lex writer, why the change of plan?
Presented by John Murray Brown and produced by Fiona Symon
From the Financial Times in London, I'm John Murray Brown and this is Ft news. Saudi Arabia is considering delaying plans for an international listing of its state oil company, Saudi Aramco, in favour of a private share sale to foreign governments and other investors. The planned listing of a 5% stake inside Aramco was the centrepiece of an economic reform programme led by the kingdom's crown prince, Mohammed bin Salman, aimed at diversifying the economy and reducing its dependence on crude oil. So why is the kingdom now reconsidering this move? Here with me to discuss this is the FT's oil and gas correspondent, Anjli Raval, and Alan Livsey, a Lex writer. Anjli, first of all, you helped break the story. What kind of a share sale is Saudi Arabia now considering as an alternative to an international listing?
So after more than a year of trying to figure out how to do an international stock exchange listing, for example, in London or New York, it's now emerged that the company and its advisors are looking at effectively a private sale to sovereign wealth funds and potentially other institutional investors alongside a domestic listing on the Saudi Tadawul exchange. I mean, they could still do an international listing, but we've been told that it would be a lot later than 2018, which is the initial plan.
And will this have implications for the amount of information they will have to disclose, the reserve levels and that sort of thing, which obviously investors will be very anxious to see?
Part of the reason for the turnaround is that there were concerns about how feasible any international listing would be. And they just need more time to, as you say, try and prepare the company to disclose information on things like their reserves and their financials. But also, if they did want do an international listing, they would have to be prepared for whatever listing requirements there would be, for example, in London or New York. New York has new rules, which mean that the families of the victims of 9/11 can actually sue Saudi Arabia. Meanwhile, in London, there's been a bit of a backlash from institutional investors who believe that regulators here are trying to water down rules to allow Aramco to list. So there are all these things that Aramco is having to deal with. And from the financial advisor standpoint, they really just need more time.
And in terms of the private share sale that we discussed earlier, who is the most likely buyer do you think?
We've heard that China is expected to play a key role here, China being a big cornerstone investor through its state oil companies and any kind of sovereign wealth fund is one option. We've also heard that they are keen to try and get as many sovereign wealth funds on board, so it may not just be limited to China.
And the 31-year-old crown prince, Prince Mohammed, this was the centrepiece of his economic reform programme. If they were to drop this plan or to take a different route to sell these shares stake in Saudi Aramco, how much of a humiliation would it be for him?
I think it'd be a really big deal. We have to remember that it was Prince Mohammed himself that announced the idea of listing at all. He basically front run any internal studies that needed to be done. And he was the one that was leading the charge. From his point of view, a listing of Saudi Aramco is super important, because they're trying to privatise the Saudi economy. And if they can't do it to the biggest and most well-run company there is in Saudi Arabia, it doesn't really bode well for other institutions. Also, they really need to generate cash in some way from Aramco through some kind of private sale, because the money that they raise will be used to then plough into non-oil investments as they try to diverse the economy away from oil.
Now, Alan, you've looked at the valuation of this company. And Prince Mohammed, I think, in the past has talked about a figure of $2 trillion, which would be the equivalent of the Italian or Indian GDP. Tell us how you came up with the figure of $1 trillion as an alternative.
Well, to begin with, the $2 trillion number-- it's very difficult to get to that number. To calculate my number, I discounted cash loans over time. I made certain assumptions about the oil price, the production, the taxes that Saudi Aramco pays back to the government via royalties. And putting all those together into the future, I came up with a present value of what this company is worth. And it's very difficult to get too much more than $1 trillion. So that, I think, has really irritated the Saudi hierarchy. I think they were hoping for something more like $2 trillion, so this is causing them a little bit of despair. I think also listing on the stock exchanges would have gotten them a bigger valuation. You have a different type of investor, putting aside some of the issues that Anjli raised. If it was done in New York and in London, I think a global, relatively liquid listing would probably enhance the value. If they're now going to do that in a private transaction, I think we have to expect an even lower valuation, frankly, than even the sort of $800 billion to $1 trillion that I came up with.
So this would involve a hefty discount, you're saying.
I think so, because it would be private. And you really are dealing with possibly only one, two, maybe three sovereign wealth buyers, right, Anjli? So already numbers are out there. They can do their numbers. Why should they be the cornerstone investor for a really high valuation?
And what are the reasons why Saudi Arabia appears to have become nervous about an international listing? Is the geopolitical tensions, one being the threat of legal action in the US? Tell us, Anjli, what that could involve.
I think when we look at the new plan and how it differs, it's largely to do with the fact they will have more control. They have more control over how much they disclose. They don't have to abide by some of these rather stringent international listing rules, whether the listing would be in London or New York or elsewhere. The facts we've mentioned already-- it's a very litigious society in the US, and that is one major risk that they face. And in London, there's also a lot of anger within the broad community about how Saudi Arabia is behaving in terms of its foreign policy. And all of those things do come together, because if you are Saudi Arabia, you're looking at how welcoming an environment-- we've mentioned London and New York but any jurisdiction-- is for you listing. And at the moment, they're facing a lot of challenges.
Can I just say something there? Actually, FCA here, the Financial Conduct Authority in the UK, has gone out of its way now to create a sort of relaxed, what they are calling a premium listing, for sovereign issuers. That's up for proposal. It has not been finalised. But what was striking to us at Lex was that they were willing to kind of bend over backwards. There's some talk-- and I think you've reported on that-- they spoke to Saudi Aramco first. But there are other sovereign listers out there that might want to list. KazMunayGas in Kazakhstan might want to come to the market. There are others that may want to come, other oil companies that would make it easier for them. So they are trying to sort of lure the business away from New York, where there are potentially issues with this-- the law that passed last year, by the way, is called the Justice Again Sponsors of Terrorism Act, JASTA.
But would what has happened this week, or the news of a possible delay in the international offering-- would that suggest that the UK FCA has not offered enough, not done enough to accommodate the Saudis?
I think it's too soon to say. Tweaks here and there doesn't necessarily mean that there would be no lawsuits. That, I think, is a major concern. What do you think, Anjli?
The one thing I would add is that, even if the FCA is, as you say, bending over backwards to figure this out for them, there is still widespread discontent in the investment community in London, because there is this question over standards and to what extent are we here in London diluting the standards in order to let companies like this in.
OK, well, thanks very much, Anjli and Alan. Obviously, this will be a huge deal as and when it happens, whatever happens. And we wait to see.