A Boutique Investment Bank's Aramco IPO Grand Slam

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of the hydrocarbon economy.” He notes that long-haul heavy transportation has been steadily switching its fuel from diesel to liquefied natural gas, and that many harmful petroleum-based products face bans on their usage. “The Saudis are anticipating this and they are looking to diversify their economy.”

But it remains unclear how exactly Saudi Arabia plans to become a diversified economy in short order after decades as an oil producer. “Are they going to compete with Samsung in electronics? With Apple in design of electronics to be produced elsewhere? With China as a manufacturer? With the U.S. as a producer of software? Or are they going to become a trading powerhouse and compete with Berkshire Hathaway?” asks Eric Clemons, Wharton professor of operations, information and decisions. “I don’t yet see the transition to industrial conglomerate or to an investment powerhouse.”

However, those pathways do exist, according to a 2015 McKinsey Global Institute report titled “Saudi Arabia Beyond Oil: The Investment and Productivity Transformation.” The report said, “A productivity-led economic transformation could enable Saudi Arabia to double its GDP and create as many as six million new jobs by 2030.” But Saudi Arabia must invest $4 trillion in the following sectors: mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, healthcare, finance and construction.

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“Are they going to compete with Samsung in electronics? With Apple in design of electronics to be produced elsewhere? With China as a manufacturer?” –Eric Clemons

In mining alone, the country has enormous potential. The crown prince told Bloomberg News in 2016 that Saudi Arabia has 6% of the world’s uranium reserves, and as such, it is “another oil that we have not exploited.” The nation also only uses 3% to 5% of its mining resources such as gold, silver and phosphate.

The Dawn of a New Order

A bigger issue for Saudi Aramco is that it has to get used to increased transparency since it is becoming a publicly held company. The crown prince indicated this would be a welcome change. “People in the past were unpleased with the fact that Aramco’s files and data are undeclared, unclear, and non-transparent,” he said in an interview with Al Arabiya. But the IPO would make all that transparent “and it will be under the supervision of all the Saudi banks, analysts, and thinkers,” he added. “All the international banks and the studying and planning centers in the world will supervise Aramco intensively.”

The crown prince also emphasized that although he is the chairman of the Public Investment Fund, the owner of Aramco, its board of directors will take the final call on how to run the fund. “I cannot take a decision unless it complies with the governance.”

Still, transparency might only go so far. It is likely to structure its IPO in way that it keeps the size of its oil reserves hidden, says Wharton finance professor Erik Gilje, who teaches energy finance, and co-authored a recent paper on investment strategies of public and private firms in the natural gas industry.

“There is a concern that if there is ever civil strife or some sort of governmental change, expropriation could be on the table.” –Erik Gilje

“They’re going to be [disclosing] either upstream assets where the reserves are well-known, or downstream or midstream assets as opposed to giving a clear visibility into what their actual reserves are,” Gilje adds. “That is a secret that apparently only a handful of top people at Saudi Aramco and the Saudi government know.” The purpose of that secrecy “is to not show their hand to the world oil markets, and I don’t think this listing is going to force them to disclose any of that secret information.”

One cause for concern is that minority shareholders owning 5% of Saudi Aramco “can be a much different situation than owning 5% of any other company,” says Gilje. “Depending on where the assets are of the entity that will be publicly traded, there is a concern that if there is ever civil strife or some sort of governmental change, expropriation could be on the table in a way that people may not imagine right now.”

Gilje notes that the oil industry has a history of expropriation. Aramco stands for Arab American Oil Company and it used to be owned by four U.S. major oil companies before it was expropriated, he points out. Aramco’s original owners were Standard Oil of California (through a subsidiary), the Texas Company (later Texaco), Standard Oil Company (later Exxon), and Socony-Vacuum Oil Company (later Mobil). The Saudi government took over in stages between 1952 and 1980.

One model Aramco could follow is that of Temasek, the sovereign wealth fund of Singapore, Meyer says. It has been free from political interference and brought in robust gains. Since its founding in 1974, Temasek has posted compounded annual returns of 15%, and its net investment portfolio was worth Singapore $242 billion (US$170 billion) as of March 2016, nearly doubling over the past decade, according to the fund’s report.

Whatever the future may hold for Aramco, one thing is certain: the impending IPO and Moelis will play a vital role in shaping it.

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