Sometime in the next 12 to 24 months, the world will see probably see the biggest IPO in history, and one that may remain unparalleled for a century or more – the IPO of Saudi oil giant Aramco.
Aramco says it has more than 260 billion barrels of recoverable reserves – 10 times the level that Exxon has. In addition, Aramco has marginal recovery costs for each barrel of around $6 each – perhaps the lowest in the world.
Despite all of that, the Aramco IPO faces some major challenges.
First of all, the Aramco IPO sets the stage for a tremendous diversification challenge for Saudi Arabia. Aramco likely has a value of around $3 trillion as a total company, so even selling 5% of the company will require finding investors willing to shell out around $150 billion.
That valuation likely means that Aramco will have to be listed on multiple stock exchanges around the world.
The Aramco IPO will leave Saudi Arabia with a huge pile of capital from which to diversify its economy, but it has to deal with two primary issues in order to do that: 1) reforming its legacy economy, and 2) using its new found liquidity to expand into other viable economic areas.
Reforming the Saudi Arabian economy to allow diversification starts by reforming Aramco.
Over and above the issue of finding enough investors to buy $150B in Aramco stock, Aramco itself would not meet the listing standards on any major stock exchange right now – not in London, the New York, Tokyo, or Hong Kong (though it would probably be closest in Tokyo).
Typical modern exchange standards require companies to periodically publish detailed financial data to keep shareholders apprised of how the company is doing. Aramco does not do this now, but is reportedly working on starting.
Exchanges also often require that company boards meet certain experience and diversity requirements – not diversity in a racial or gender sense, but in the sense that no investor wants to see a board packed with company insiders who can’t really represent shareholder interests well. Aramco does not meet this standard.
Exchanges also typically have financial disclosure rules that are aimed at levelling the playing field so all investors get information at the same time. Virtually all companies hold quarterly calls with investors in the interest of governance and transparency.
Aramco has no experience doing any of that.
But it is leading the charge on that effort by moving from its historical focus on oil to expand into downstream specialty chemicals like butadiene. Such petrochemicals are the basis for everything from rubber tyres to chewing gum. Aramco is working with Dow Chemical and other major industrial chemical makers on those expansions.
While it is easy for Aramco to use its vast oil business to expand into new markets, it’s hard to build economically efficient companies overnight. Specialty chemicals are not Aramco’s traditional business, and it’s unclear if it has the experience to be successful in the area.
To be a successful company in the future, Aramco will need to balance the demands of its shareholders against those of the closely entwined government.
Even though shareholders only will have a tiny stake in the overall firm – 5% for outside ownership initially – those shareholders will still expect Aramco to uphold all of the same tenants of modern corporate behaviour that other major firms do.
That will mean that firm needs a complete mindset change to be successful in the future. If it fails to do so, the company’s stock price will probably sink fast and doom Aramco’s ability to do secondary offerings in the future.