Is Saudi Aramco IPO too big to fail? Post-drone attacks reality check

Saudi Aramco IPO still remains very lucrative and its order book is almost certain to be filled but it might fail earlier market expectations.

The recent drone attacks on the biggest petroleum processing facility have shocked the world, leaders of almost all the major world powers have condemned the attacks and the United States Secretary of State Mike Pompeo himself is visiting Saudi Arabia to assess the situation. The attacks disrupted oil output from Saudi Arabia’s state-owned oil company and all of this comes amid accelerated preparations for the Aramco IPO, which is expected to be the biggest in the world.

The facilities that were targeted by the drone attacks were owned by Aramco, officially called Saudi Arabia Oil Co., which is fully owned by the government right now but they plan to launch an IPO as soon as this year, offering up to 5 percent stake of the world’s biggest company to the public.

Saudi Aramco is the biggest and most profitable company in the world. The Saudi government has earlier indicated that they are aiming a market valuation of USD 2 trillion, to put it into perspective, Apple is the only company to have even touched the USD 1 trillion mark and that too didn’t last long. In terms of profit, Aramco made USD 111 billion in profits last year, which is bigger than the profits of Apple and Microsoft put together.

These figures certainly make the Aramco IPO very lucrative but the drone attacks have exposed the vulnerabilities of a kingdom that is based on oil. The attacks have also brought investors’ attention to other flaws of this IPO, which were earlier overshadowed by the hype.

Vulnerabilities of Saudi oil facilities

This is actually not the first time that Houthis have claimed an attack on Saudi Arabia’s properties. Houthis have targeted the Abha airport more than once in 2019 along with attacks on other Saudi oil installations and oil tankers in Gulf waters. A lot of Houthi missiles and drones were intercepted by Saudi Arabia but some other have hit the targets, with the recent one including the attack on Shaybah oil field last month. It went largely unnoticed to the international community since it did not affect production.

But the attacks on Aramco’s oil facility in Abqaiq and Khurais were the most brazen yet, evident with the fact that it disrupted oil supply of one the world’s biggest oil-producing nation.

Saudi Arabia is the undisputed and de facto leader of OPEC and is considered the most powerful nation in the Middle-East. The kingdom, as well as Aramco's CEO, has made it clear that it very well capable to restore the oil supply by September-end but the attacks have most-definitely exposed the gaps that even the most advanced air defense systems couldn’t fill.

What does Aramco IPO have to offer?

USD 2 trillion valuation

Prince Mohammed indicated a USD 2 trillion valuation for Aramco more than 3 years ago but analysts and bankers had, however, said that USD 1.5 trillion would be more achievable. The valuation is also expected to be impacted by the recent attacks and Saudi Arabia’s reaction to that can potentially jeopardize the possibility of the world’s biggest IPO.

Up to 5 percent stake

The fact that Saudi Arabia is offering only a 5 percent stake in Aramco is a put-off for many. Even if an individual is able to secure the whole stake offered to the public, it will not take him anywhere close to the board. This means that all the key decisions like dividend, increasing security of Aramco oil facilities remain in the hands of the government.

The dividend is among the most lucrative reasons to own Aramco, given its huge profits but the government will be in total control of how much dividend it hands out to public shareholders. The government themselves collect tens of billions of dollars every quarter from Aramco and it forms a significant portion of their budget but low dividend to shareholders will scare away investors.

What if such attacks happen after Aramco is listed?

It can potentially tank the stock price and also the index that Aramco will be a part of. The drone attacks on Aramco facilities led to soaring oil prices and impacted global stock markets, it is only certain that such an incident will heavily impact the stock price of Aramco itself when it is listed publically. How quickly Aramco is able to restore the oil output right now will dictate the impact on its stock price if such an attack happens while it is listed.

Aramco and the Saudi government undoubtedly have the resources to restore the output and stop such attacks in the future but the ever-rising tensions in the Middle East still make it a cause of concern.

Even if Saudi Arabia goes ahead with the Aramco IPO this year itself, investors will most-definitely jump on the hype train and the order book is almost certain to be filled. But Aramco IPO might fail the expectations of market valuation and how much the issue is subscribed, or oversubscribed for that matter.

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)