Looming oil peak means more shares in Saudi Aramco should be issued

Market Line 7 February 2020 (Last Updated February 7th, 2020 10:57)
Looming oil peak means more shares in Saudi Aramco should be issued

Following an International Monetary Fund (IMF) report asserting Saudi Arabia risks running out of money, the government must issue more shares in Saudi Aramco.

The International Monetary Fund is warning Gulf states, including Saudi Arabia and the UAE, risk running of out of money in less than a decade. Plunging demand for oil amid an international push towards clean energy is chiefly responsible.

With the primary source of income for Saudi Arabia now under heaping pressure and the completion of its economic diversification strategy, Vision 2030, still years away, the government must seek to raise capital quickly.

The best means of doing this is to accept a lower valuation of state oil monopoly Saudi Aramco to generate interest in another issuing of shares.

Valuations have fallen short of expectations, but funds are needed

Originally it was hoped that 5% of the company could be sold based on a company valuation of $2tn. Several delays to the much-vaunted IPO occurred as the government refused to budge from the desired valuation.

Ultimately, the shares were sold at that valuation, but only after the percentage of the company being sold was restricted to just 1.5% and gentle encouragement was given to regional buyers.

A further 3.5% of Saudi Aramco could still be sold without exceeding the 5% the government originally sought to sell.

Yet doing so would likely demand the $2tn valuation be dropped in favour of a figure between $1.5tn and $1.7tn, where most public estimations place the true value of the giant oil company.

Doing so would raise much-needed funds to help the immediate economic situation the desert kingdom faces, alleviating the dangers which the IMF have reported and buying more time for economic reforms to bite.

In late 2019 government spending was reigned in for the first time in three years, in a show of confidence from Crown Prince Mohammed bin Salman that his economic reforms are working.

However, indications are that changes are not happening nearly as fast as required if estimates from the IMF regarding peak oil are accurate. The oil economy still dominates and most Saudi citizens still studiously avoid the private sector and therefore the non-oil economy.

Saudi Aramco must take action promptly

Selling more of Saudi Aramco now, even though oil prices are under pressure thanks to the China-US trade war and other international events, would provide much needed time for an economic transformation to occur.

Creating a buffer now means the crisis that is predicted to be a decade away can be pushed back.

Doing so quickly is essential because signs are the optimism of the Crown Prince is misplaced. During November 2019 the IMF revised downward growth forecasts from 1.9% to just 0.2%.