It’s NOT all about the economy…!
The visits of Crown Prince Mohammad bin Salman of Saudi Arabia (MBS) to London (earlier this month) and Washington (starting today) raise a number of questions of interest to investors, perhaps above all where things stand now with the proposed listing of Saudi Aramco.
Much as the British government, mired in Brexit, may have wished to focus on economic ties, including its desire to see Aramco listed on the London Stock Exchange (LSE), it was impossible to avoid other issues such as the Kingdom’s human rights record at home and the war in Yemen (not to mention the spat with Qatar on which both Kuwait and Oman have been lobbying London and Washington to bring pressure to bear on MBS to back off).
Although such protests may be higher profile in the UK (and are more likely, perhaps, to impact on the government through parliamentary/legislature pressure), in Washington too there will be problems which the Administration will not be able to side-step totally. Notably, any consideration of listing on the New York Stock Exchange (NYSE) may well be overshadowed by the Justice Against Sponsors of Terrorism Act (JASTA). Much as Mr Trump may wish to find a way to neutralise this potential threat to any Saudi asset in the US, this would not be an easy task given the overwhelming support for the Act in Congress.
And Mr Trump may struggle still more if he tries to negate the threat of possible climate change-related legal litigation against Aramco, along the lines of the actions brought by New York City Mayor Bill de Blasio against five oil companies. Although Saudi Oil Minister Khalid al-Falih may publicly have tried to dismiss these actions as "frivolous", I am sure that he is more than smart enough to realise that in America they are taken very seriously indeed.
Prospects for an early-ish initial public offering (IPO) are therefore likely to hinge to an extent on what exactly MBS hears in the two capitals — and perhaps particularly from President Donald Trump — the key point common to both the UK and the US being the height of the regulatory/legal hurdles and the willingness/ability of government to lower them in the face of domestic political risk.
Go east, young man!
This all suggests that both London and New York may fall by the wayside in due course, in favour of Hong Kong where regulatory/legal and other, more nebulous, barriers appear less demanding. Furthermore, Hong Kong may make sense if, indeed, a significance proportion of the sell-off will be through Chinese private equity rather than via an IPO. But, for now at least, Hong Kong still seems to be third choice for the Kingdom and it is by no means certain that many building blocks have yet been put in place to list there.
Hurdles at home too
But even Hong Kong can only offer a relative fast-track if the Saudis can get their ducks in a row at home.
Recent press reports suggest that they are not now aiming to list until 2019. However, it is not clear that MBS himself has signed off on delaying what is, after all, a cornerstone to his ambitious reform programme into next year. Certainly, if, as some investors had suggested, the Saudis were previously aiming to get this done by Ramadan 2018, they must have abandoned that target by now given that they have only until 15 May. Indeed, with the (slow in Saudi) summer months coming immediately thereafter, realistically September would seem to be the earliest likely date (which may not preclude an earlier announcement of some sort — albeit one which would risk being premature). But even that would be a stretch if one considers the following points which are on the mind of some experts and which continue to cast some doubt over whether an IPO will happen at all.
- Do the Saudis have the institutional capacity to get an IPO done even by the end of the year — getting the green light from whichever exchange they want to list on, getting the prospectus together, ensuring that the investor community is interested, doing the road shows etc? Especially if MBS personally is pre-occupied with his anti-corruption drive, with Vision 2030, with Yemen/Qatar/Lebanon/Iran?
- Will their advisors tell them that they risk being sued if they list without detailing payments out of Aramco's budget to members of the royal family? (The answer to that must be ‘yes'; so the question moves to 'are they willing to make those disclosures?’.) Bear in mind that for the LSE they have to provide three years financial statements; so they can't just push those payments onto another government agency this year and pretend they never happened. If Aramco's numbers seem to have gaps in them then there are plenty of people who will be happy to take them to court and force more disclosure in court documents, significantly delaying any listing in the process.
- When push comes to shove, have they got a good 'story' for equity investors? The Saudi government debt story is quite convincing in terms of current low debt levels, high reserves and MBS’s broad reform agenda. But where's the upside in the Aramco equity story? It's a company that extracts oil from the ground and sells it for whatever the market price is. For sure, it has been doing this quite well for decades. Nevertheless, the question still rises, whatever the price is today, as to what are the factors that are going to make it more valuable in (say) five years time? Maybe the 'story' is to see a share in Aramco as a bond, in that the company does throw off a lot of cash so can pay big dividends. But even then investors will need to know exactly what the long-term tax/dividend arrangements will be vis à vis the Saudi government.
- Finally, there is also the issue of disclosure of oil reserves and a continuing obligation to disclose material new developments, which include discoveries of new oil reserves or the conversion of previously unrealisable reserves into oil which can be sold. Investors will want all such reserves to be disclosed. In this, investors' interests would seem to be aligned with those of Saudi Arabia in principle at least. But this may still be no easy nettle for a notoriously un-transparent regime to grasp.
Could Iran (inadvertently) help?
As I noted in my 18 March article, in early May Mr Trump will be invited to sign off again on a sanctions waiver associated with the Iran nuclear deal — or Joint Comprehensive Plan of Action (JCPOA) to give it its proper name. It is, in my view, pretty much a given that MBS will be urging the President to deliver on his promise not to do so unless the Europeans can persuade Tehran to meet a number of tough demands, which is very unlikely to happen. And he will likely also ask Mr Trump to go further and seek to have reimposed a cap on Iran’s oil exports, of 1.1mbpd, which was lifted as part of the JCPOA — with the consequence that Iran is now exporting around 2.6mbpd.
In a wide-ranging article in the 19 March edition of the Financial Times (subscriber access only) focusing on MBS’s visit to Washington, Anjli Raval reported that:
“The country also wants a higher long-term oil price to increase the valuation of the initial public offering…. But even [Economy Minister Mohammed] Al Tuwaijri recognises the spectre of US shale production hanging over oil prices.”
She goes on to note that MBS personally believes that “stronger global economic growth, rising oil consumption and natural decline rates at existing fields” will drive up demand for Saudi crude (which may currently be in decline thanks, notably, to China looking to diversify its sources and to import more oil from the US in response to growing pressure from Washington to reduce its bilateral trade surplus). But the International Energy Agency (IEA) believes that growth in US output should be match the growth in global demand through to 2020.
How convenient it would be, therefore, if Iran’s exports were to be significantly trimmed again, potentially serving not only Riyadh’s regional agenda but also MBS’s domestic one.
This being said, personally I think it very unlikely that Mr Trump could secure international agreement to restrict Iran’s oil exports again, as things stand. But talk of such might be sufficient to push up the oil price at least temporarily (as we saw last week with the nomination of Iran hawk Mike Pompeo to replace Rex Tillerson as Secretary of State). However, even if there was a reasonably sustained uptick, in the absence of substantive developments to underpin it I tend to agree with Mohammed Ali Emadi, an advisor to Iran’s national oil company, that price rises are more likely to play to the advantage of the US shale producers than to MBS. Which suggests, to my mind at least, that we are only likely to see a sustained greater than USD70pb price for Brent this year in the event of a protracted supply side shock.
Will he, won’t he?
All this being said, MBS’s general track record over the past couple of years and the lack of progress with economic reform to date (some worthwhile steps on social reform notwithstanding) suggest that he may urgently need a big ‘win’ — which a successful IPO of Aramco certainly would be. Furthermore, there are some signs at least that he may now be much more focused on the domestic agenda, with ‘regional issues’ pushed somewhat down the agenda.
Whether such a success would promptly be followed by King Salman’s abdication in favour of MBS is a question on which views are mixed. But at least some experts believe that if MBS is wise he would prefer to keep his father in place for the foreseeable future as a lightning conductor. However, the same experts acknowledge that this does not mean it is how things will pan out.
[Image Credit: Newsweek]