On Thursday we explained the upcoming IPO of the world’s most valuable company: Saudi Aramco, Riyadh's state-owned crown jewel that’s the world’s most prolific crude producer.
The move comes as Saudi Arabia burns through cash and takes on debt in a desperate attempt to plug a yawning budget hole created by the largely self-inflicted pain from "lower for longer" crude.
Pressured by declining oil revenue, the cost of financing multiple regional proxy wars, and the necessity of maintaining costly subsidies for everyday Saudis, Riyadh is apparently resorting to what we called “a stunning Hail Mary”: privatization.
On Friday, the kingdom confirmed it's mulling plans to sell a stake in the company. Here’s the official statement:
Saudi Aramco confirms that it has been studying various options to allow broad public participation in its equity through the listing in the capital markets of an appropriate percentage of the Company’s shares and/or the listing of a bundle its downstream subsidiaries.
Once the study of these various options is complete, the findings will be presented to the Company’s Board of Directors which will make its recommendations to the Saudi Aramco Supreme Council.
This proposal is consistent with the broad and progressive direction pursued by the Kingdom for reforms, including privatization in various sectors of the Saudi economy and deregulation of markets, which the Company strongly supports.
Saudi Aramco would like to emphasize that this process will strengthen the Company's focus on its long term vision of becoming the world’s leading energy and chemical enterprise. This includes prudently managing the Kingdom’s hydrocarbon resources, adding value across the value chain, reliably meeting its customers’ demand, and meeting its stakeholder and environmental commitments.
As we noted before, "Aramco has the largest known oil reserves at around 261bn barrels – almost 10 times more than Exxon Mobil."
In order to get an idea of the sheer magnitude, consider the following chart which shows that when it comes to crude, no one does it like Riyadh:
Some more thoughts from RBS analysts this morning, which largely coincide with our own noted previously:
Saudi Arabia is reviewing an Initial Public Offering of the country’s national oil company Aramco, said Saudi Arabia’s Deputy Crown Prince and Defence Minister in an interview with the Economist. Saudi Arabia is currently the world’s largest producer of oil (10m barrels of oil per day), and Aramco has the largest known oil reserves at around 261bn barrels – almost 10 times more than Exxon Mobil. With Aramco’s total value likely to run in the “trillions of dollars” according to Saudi officials, the Saudi government’s discussion to sell a stake in its crown jewel is in order to plug the country’s fiscal deficit which has widened significantly as oil prices dropped 70% in 18 months (the Saudi economy is heavily reliant on oil, which accounted for 78% of its total exports in 2014). The government reported a fiscal deficit of $98bn in 2015 (15% GDP), and expects a deficit of $87bn in 2016 despite planned budget cuts.
Saudi’s firepower seems less impressive when compared with its fiscal deficit. In his interview with the Economist, Saudi Arabia’s Deputy Crown Prince alluded to the country’s significant firepower to combat lower government revenue from weaker oil prices; these include low government debt, high foreign reserves and the potential sale of national assets. However, at a budget deficit of around $87bn, the Saudi government may quickly deplete its available firepower; the country could burn through its foreign reserves or reach debt to GDP of 100% in around 7 years. In an environment of lower for longer oil prices, the government will need to look for more lasting solutions to its deficit problem and we therefore expect further budget cuts through lower subsidies and higher taxes.