Aramco (Private:ARMCO) IPO is generating a lot of interest in global markets. And it certainly deserves this attention, for, at an estimated valuation of $2tn (debated), and 5% on offer, it would be the world’s biggest IPO ever.
Why is Saudia Arabia (‘SA’) doing it?
The perennially low oil prices have created budget deficits for SA. By selling a small stake in its national oil company, SA is hoping to finance these deficits, as also to raise funds to finance its efforts to reduce the economy’s dependence on oil, by developing non-oil industries under its Vision 2030 plan.
How will it impact global oil markets?
Short term: With around 261bn oil barrels in reserves, the value of Aramco’s assets has a direct relationship with oil prices. Higher oil prices will help drive up the IPO price. In the short term, therefore, it is expected that SA will do everything it can to keep oil prices stable and up, to gain a good price for the IPO of its national jewel.
Long Term: Even though the stake sale is small and the Saudi family would retain control of Aramco, listing the company and introducing outside investors would entail public scrutiny and require keeping investor interest and profits above the whims of the Saudi family. Investor’s profit maximisation goals could impact the Saudi family’s ability to control oil prices, could create conflict with OPEC’s agenda and impact SA’s position in OPEC. This conflict of interest could possibly threaten OPEC’s existence and significantly change global oil dynamics.
Disclosure: Author and stakeholders of CityFALCON may have vested interest in the financial securities discussed in the article.