Saudi Arabia plots new path to long-delayed Aramco IPO

Key Points
  • Saudi Arabia's energy minister says long-delayed IPO for state oil giant Aramco will occur in 2021.
  • Aramco releases independent audit of oil and gas reserves and promises more financial information ahead of bond offering.
  • The moves further prep the market for the IPO, which is expected to be the largest ever.
An Aramco employee walks near an oil tank at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia.
Ahmed Jadallah | Reuters

Saudi oil giant Aramco is undertaking a series of moves that may pave the way for a long-delayed stock market debut.

The kingdom plans an initial public offering for Aramco in 2021, Saudi Energy Minister Khalid al-Falih said during a news conference Wednesday. Falih backed the latest target for the IPO with several announcements that would essentially prep the market for the debut, which is expected to be the largest ever.

Saudi Arabia on Wednesday released the results of an independent audit that confirms the kingdom controls more than 260 billion barrels in oil reserves. The assessment makes the metrics behind the world's largest energy company — long the subject of skepticism — a bit less opaque to potential investors in Aramco.

"This certification underscores why every barrel we produce is the most profitable in the world, and why we believe Saudi Aramco is the world's most valuable company and indeed the world's most important," Falih said in a statement.

Falih later announced Aramco will issue bonds in the second quarter of this year. In order to tap the debt market, Aramco will release additional financial information, offering a wider glimpse into a private company whose inner workings are a closely held secret.

Saudi Arabia must move faster to diversify its economy: Economist Intelligence Unit
Saudi Arabia must move faster to diversify its economy: Economist Intelligence Unit

"That shows that Aramco's hesitation about doing an IPO is not about keeping information private," said Ellen Wald, an independent energy policy analyst at Transversal Consulting. "It's not because they're hiding something."

Falih did not say how much the bond sale would seek to raise, but it is widely expected to underwrite at least part of Aramco's purchase of a majority stake in Saudi petrochemicals company Sabic. The 70 percent stake that Aramco intends to buy is controlled by Saudi Arabia's sovereign wealth fund and valued at roughly $70 billion.

Falih dismissed speculation that Aramco will fund the entire purchase with cash raised in the bond sale. The kingdom is aiming to complete the acquisition and update its balance sheet with the Sabic assets before it presents an IPO to the market.

Waiting for Aramco

If Aramco follows through in 2021, it would mark the end of a long and winding road.

Saudi Crown Prince Mohammed bin Salman first floated the idea of listing roughly 5 percent of Aramco on international stock markets in January 2016. The kingdom hoped to fetch a $2 trillion valuation for Aramco and raise about $100 billion to fund Crown Prince Mohammed's economic transformation plan.

Aramco initially targeted the second half of 2018 for the IPO, but the process reportedly got bogged down by indecision over key issues such as where to list shares. Independent assessment also doubted Aramco would be valued at $2 trillion.

Discussing the outlook for Saudi Arabia in the next year
Discussing the outlook for Saudi Arabia in the next year

By early 2018, a plan emerged to first list shares on Saudi Arabia's domestic stock market. Then, Falih conceded in May that 2019 was the new target for an international listing. In August, Reuters reported that Aramco was scrapping the IPO. Falih dismissed the report and said the company remained committed to its plan.

The delay makes sense for several reasons, said Wald, who chronicled Aramco's history in "Saudi Inc.: The Arabian Kingdom's Pursuit of Profit and Power."

Today's IPO market is heavily geared toward companies with huge growth potential, and while Aramco turns tremendous profits, it would be more of a value stock churning out steady dividends, she said.

That is the case for international oil companies like Exxon Mobil and Royal Dutch Shell, but Aramco's refining and petrochemicals units are small compared with its integrated peers. It makes sense that Aramco would want to shore up this high-value business before being evaluated against other oil majors, according to Wald.

Aramco's plan to tap the debt market also speaks to those ambitions, in her view.

"It could indicate that they are looking to make massive expansions beyond what they are self-funding and that's definitely been indicated by some of the news we've heard," she said.

In addition to diversifying into petrochemicals through the Sabic deal, Aramco is reportedly exploring investments in the booming market for liquefied natural gas.

Aramco is in talks to buy a stake in a Russian Arctic LNG project, according to Reuters. Aramco is also mulling an investment in one of several planned U.S. LNG terminals, The Wall Street Journal reported earlier this week.