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When Saudi Arabian Deputy Crown Prince Mohammed bin Salman hinted at selling shares in state-owned Saudi Aramco in January, speculation was rife from the media and commentators over what the company was worth. In an interview with The Economist, bin Salman said he was "’enthusiastic"’ about the prospect, which is being reviewed within the company.

The magnitude of the reserves held, estimated to be 266.58 billion barrels by the Organisation of Petroleum Exporting Countries (OPEC), combined with its other holdings in Saudi Arabia and abroad makes the task of valuing the company extremely difficult. Some analysts have attempted it, predicting the worth would dwarf companies such as Apple and Google with estimates ranging from $2.4 trillion from Alan Livsey at the Financial Times to $10 trillion reported by the Guardian and the Economist. The lower range would still make Saudi Aramco eight times as big as Exxon Mobil, the largest listed oil and gas company.

Details are being drip-fed to the press as Saudi Aramco considers its options. In a statement released in the days following The Economist interview on 4 January the company confirmed 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 of its downstream subsidiaries."

Why now?

The news of possible flotation was met with much fanfare among industry analysts and the media, primarily because it was unexpected. Apta Consulting’s managing partner, Santosh Singh says this could be for two reasons, long-term low prices putting pressure on the Saudi Government and plans to expand into the downstream sector.

He says, "In times like this it is prudent to finance their upstream and downstream expansion plan through a nominal equity sale rather than putting their own cash to work."

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"What better way to begin than with a small piece of the jewel in its crown"

It could also be argued that as Saudi Arabia slowly moves toward a more open and progressive society, both in civic and capital market terms, it wants to attract investment. What better way to begin than with a small piece of the jewel in its crown, one of the highest valued companies in the world.

Partial privatisation is not unheard of in Saudi and perhaps the successful initial public offering (IPO) of a number of high-profile Saudi assets in the last decade have influenced the decision to go ahead with the Aramco offering. In July 2008 Ma’aden, the state’s mining company, sold 50% of its shares, raising SR9.25 billion. This enabled expansion and provided much-needed jobs.

Providing more jobs could be another motivation for offering up shares in Aramco, according to PriceWaterhouseCoopers’ global oil and gas strategy consulting leader, Viren Doshi. "Saudi Arabia has nearly half its population of under 30 entering the job market," he says. "Saudisation is just one of the many levers that some of these companies are applying to alleviate the situation."

Saudisation is a government policy to improve employment levels of Saudi nationals in the private sector, requiring companies to employ certain numbers of Saudi nationals depending on their size and industry. They are also given a rating according to the proportion of nationals hired.

Assessing the options for an attractive proposition

Most commentators agree that any listing is unlikely to include upstream assets such as exploration, production or drilling. "I don’t think they will sell any stake in their upstream business," says Singh.

This theory seems to have been confirmed by the chairman of Saudi Aramco, Khalid al-Falih at the Davos conference who, in an interview with Al Arabiya, said "The reserves would not be sold, but the company’s ability to produce from the reserves is being studied."

"The more likely outcome is the parcelling up and sale of the company’s refinery and downstream assets"

Instead, the more likely outcome is the parcelling up and sale of the company’s refinery and downstream assets. For this to happen, Saudi Aramco would have to split the huge company into smaller businesses, including upstream, refining, chemicals, shipping and others in order to sell shares in them. According to Doshi "This is one way for the kingdom to IPO parts of the group without losing 100% control over the oil reserves in its upstream."

This could begin with the sale of the one million barrels a day refinery capacity located in Saudi Arabia and owned solely by Aramco.

Although downstream assets are not as desirable to investors as upstream, there could be benefits to investing in the Saudi Aramco offering. A report released by Wood Mackenzie, a global energy mining and metals consultancy to its clients spelled out a range of benefits in investing in Aramco’s downstream assets, calling it "an attractive proposition".

The benefits it listed included "a unique growth opportunity, as [Aramco] plans to develop additional capacity, to meet continued demand growth in the Middle East and Asia, and secure routes to market for and add value to the kingdom’s natural resources". It also added that the company has a diverse base of refining and petrochemical assets and a supply and trading business, which could be a source of value generation for investors, among other advice.
Chief oil analyst at the Oil Price Information Service Denton Cinquegrana agrees that investing in Aramco’s refinery assets could be a good option. "Right now refining is a ‘sexy’ asset…Refinery valuations have been on the rise over the past couple of years."
If markets could be influenced by gossip alone, and they often are, then Aramco’s recent revelations could have lasting effects globally. The fees alone from a sale of this size will have banks rushing to be part of it.
However, the IPO may have a negative effect on other businesses in the sector, says Santosh that "The sheer scale of the IPO of a trillion dollar company like Saudi Aramco can dwarf the scope of other potential IPOs of other smaller firms, he says. "This may lead to other potential IPO being shelved due to fear of the failure to grab the attention of investors around that time."

A look into the unknown

If the company chooses to sell a small stake in the entire business, as has been suggested by some analysts, it will be open to scrutiny of its practices and the true amount of reserves the company owns. Both closely guarded secrets.

It is doubtful the company will be able to float even a 5% amount on the Saudi exchange, so it is likely the shares will be sold on the international market.

Saudi Aramco could maintain a hold on closely held information on its reserves by parcelling out its downstream business. "Raising cash through stake sale in the downstream business on will help their expansion plan in that area without divulging any information related to upstream business" says Singh.

However, the Deputy Crown Prince has not shied away from the transparency issue, saying of the IPO, "I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco."

Whether this is a genuine wish of the Saudi Regime is yet to be seen, but the attention alone on this IPO will increase scrutiny on the company shrouded in secrecy.

So far, the amount known about Aramco’s IPO intentions is similar to that known about its business practices and reserves – not a great deal. As Saudi Aramco has not set a public timeline for the IPO, speculation will invariably continue until more news is released.