Will Saudi Arabia put Aramco IPO proceeds to good use?

Within days of its public listing, the value of Saudi Aramco shares hit the coveted $2 trillion mark. It must have been a moment of joy for Crown Prince Mohammed bin Salman, who has been at odds with Western financial advisors holding the view that he was demanding too much for the oil giant.

Dhahran-based Aramco racked in a net profit of $68bn in the nine months to September. And it is valued more than the combined worth of the world's top oil companies - Exxon Mobil, Chevron, Total, BP, and Royal Dutch Shell. 

After multiple delays, Aramco finally went ahead with its initial public offering (IPO) on December 11, when it sold a 1.5 percent stake and raised $25.6 billion. That put the total value of the company at $1.7 trillion. 

Then began trading in shares at the local Tadawul exchange and on December 16, the company was worth $2 trillion. Analysts say the rise in share price is probably the result of Riyadh’s influence over Saudi and Gulf-based investors. 

Unlike its original intention, Aramco dropped plans to aggressively sell the shares to Western investors. Just days before the IPO, it cancelled planned roadshows in London and elsewhere and began cajoling local and regional institutional investors. 

"[This] has meant that the valuation and stock price that Saudi Aramco is currently trading at is not necessarily the same that the international community and Western investors would value the company at,” Matthew Bet, Stratfor’s Senior Global Analyst told TRT World.

Saudi authorities have sweetened the deal to woo investors investors and to shore up the value of the stock. For instance, investors have been offered bonus shares if they don’t sell the shares for six months and promised billions of dollars of dividends next year. 

Money managers in the US, Europe, and other non-Gulf countries, will still want a bite of Aramco. However, the absence of foreign investors who could keep a check on Aramco management has raised some questions about the whole exercise. 

A narrow opening 

When MBS first floated the idea of taking Aramco public in 2016, he linked it to bringing market reforms in the conservative kingdom. 

For the first time, people other than the tightly-knit royal family and a few executives would be able to see the inner workings of the world’s biggest oil producer, the IPO promised. 

Then came the question of seeing what Aramco was really worth. Potential investors had to factor in the risks such as the September attack on Abqaiq oil facility, which knocked out half of Aramco’s production, and a global shift towards electric cars which can dampen oil demand.  

In an ideal situation, market participants would have been allowed to determine the value of the company. But the insistence of MBS to put a higher price tag brought home the reality about who was really in charge. 

Having Aramco shares in the hands of wealthy Saudi families and institutional investors from friendly countries helps Riyadh keep a close control over the company. But it doesn’t serve the purpose of building the type of confidence that attracts foreign investment. 

Then there’s the question of how Saudi Arabia intends to spend the money raised from the IPO. 

All in the family 

MBS wants to use the proceeds from Aramco share sales to fund projects under his Vision 2030 programme, which is aimed at weaning Saudi Arabia away from oil. 

“We don’t know a great deal” about how the money will be spent, said David Butter, a Middle East analyst at the Chatham House. 

The proceeds will go to Saudi Arabia’s sovereign wealth arm - the Public Investment Fund (PIF), which has made high-profile investments in Softbank’s Vision Fund and Uber. 

“When the idea of the IPO was first discussed it was kind of linked to providing a lot of ammunition for the PIF to support its acquisition of international assets. Now the question is has this strategy has changed and will it me more domestically focused,” says Butter. 

But Saudi Arabia’s appetite for a global footprint has waned over the past year.

“If we go back a year or two there was a lot of interest in Tesla and Virgin Galactic. That has sort of cooled a little bit partly because of the impact of the Khashoggi affair,” says Butter. 

“In one sense it’s moving money from one part of the system to another. Ultimately all roads go back to the MBS.”

The brutal murder of journalist Jamal Khashoggi at the Saudi consulate in Istanbul has put the spotlight on the crown prince’s ruthless streak. 

The Saudi regime suffered a major setback last year when businesses pulled out from a major international investment Matthew Bet says PIF will probably make investments within the country. 

“Domestic investment is a major focus and it is aiming to help build the country's private sector. It announced this week the launch of a new four billion Saudi riyal ($1 billion) fund to help Saudi Arabia's SMEs.” As part of his Vision 2030, MBS wants to bring sweeping changes which include a greater role for the private sector in giving jobs to a burgeoning young population. 

He wants to open up cinemas and amusement parks, as well as reduce the country’s reliance on oil revenue, which funds most of the kingdom's budget. 

Bet says Saudi Arabia has to increase its labour productivity and invest massively on education to achieve those goals. 

“It has to invest heavily in training and the culture of young Saudis wanting a well-paying easy government job needs to change. That's a tall order.”