As The Saudi Economy Implodes, A Fascinating Solution Emerges: The Aramco IPO

Tyler Durden's picture

Earlier today we reported that when it comes to Saudi Arabia, things are going from bad to abysmal, with the market is clearly aware of it. Saudi riyal forwards hit their highest level in almost two decades as oil plummeted: twelve-month forward contracts for the riyal climbed 260 points, and set for the steepest close since December 1996 on growing speculation the world’s biggest oil exporter may allow its currency to slide against the dollar for the first time since 1986 (incidentally, Bank of America's "Number One Black Swan Event For The Global Oil Market In 2016").

 

Alongside this, Saudi default risk has also been rising, and as of this morning Saudi CDS traded wider than Portugal:

 

The reason for this suddenly quite dire outlook on Saudi Arabia is that as the kingdom has made very clear over the past year, it will continue with a strategy of oversupplying crude even if it means sending its fiscal deficit soaring, forcing the country to draw down on its reserves, and load up on debt.

 

In other words, as long as Saudi Arabia refuses to relent and allow oil supply to catch up with demand, thereby pushing the price of il higher, it is slowly crushing not only its competitors such as the high-cost OPEC producing nations and marginal US shale companies, but itself as well. The biggest question is how much longer Saudi Arabia can continue this self-punishment, one which recently spilled over with Saudi Arabia forced to boost gas, water and electricity prices and in effect, dismantle its welfare state, risking widespread social unrest.

And then earlier today everything changed when Saudi Arabia's unveiled what may be a stunning Hail Mary: one which is great news for the suddenly liquidity challenged Saudi government, and is very bad news for the future price of oil.

According to the Economist, Saudi Arabia is contemplating taking Saudi Aramco - arguably the world's most valuable company - public. To wit:

SAUDI ARABIA is thinking about listing shares in Saudi Aramco, the state-owned company that is the world’s biggest oil producer and almost certainly the world’s most valuable company. Muhammad bin Salman, the kingdom’s deputy crown prince and power behind the throne of his father, King Salman, has told The Economist that a decision will be taken in the next few months. “Personally I’m enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco.”

 

 

The potential listing comes as Saudi Arabia grapples with the damage wreaked on its economy by an oil-price collapse to below $35 a barrel, as well as mounting tensions with its arch-rival Iran, following the execution of Saudi cleric Nimr Baqr al-Nimr in early January. It is just one possible step in an ambitious plan to balance the budget and throw open the country’s closed economy.

 

* * *

The upstream part of the business would be most attractive to investors. At 261 billion barrels, Saudi Aramco’s stated hydrocarbon reserves are more than ten times those of ExxonMobil, the largest private oil company. Saudi Aramco is also one of the world’s lowest-cost oil producers, thanks to the ease of pumping oil in Saudi Arabia.

The financial community immediately sprang up to analyze what a deal like this would mean.

According to Bloomberg oil strategist Julian Lee (who worked for the former Saudi oil minister Sheikh Yamani) the possibility that Saudi Aramco might sell shares to investors is unlikely to bring degree of transparency that oil, equity markets might want.

If there were to be an IPO, investors’ wishlist for information about Saudi Arabia would include: detailed published, externally verified reserves; similar estimates of spare output capacity; published, audited report and accounts, and so on.  Lee notes that it would be challenging for Saudi Arabia to share detailed information on reserves, production capacity as those are often regarded as state secrets in oil-producing nations; any possibility of reserves, output capacity being downgraded by external assessors would be unacceptable to Saudi Arabia.

Furthermore, the IPO would be unlikely to happen on world’s biggest exchanges, which would require greatest transparency.

Others were comparably skeptical:  according to SocGen's Mike Wittner, the IPO of Saudi Aramco wouldn’t immediately impact oil prices, adding that a potential IPO doesn’t indicate any change in Saudi strategy of letting the oil price do the job of managing global supply.

He is correct: it wouldn't immediately impact prices; it would however have a huge impact on oil prices over the longer run.

Because reading between the lines, what this announcement really means is that Saudi Arabia is scrambling: for it to resort to partial privatization of its crown jewel, which is what selling stake in an IPO would mean, it suggests two things: the government is desperate to obtain liquidity at any price, and it means that if successful, the Saudi regime will be able to continue its strategy of crushing its high production cost competition for a long time thanks to the new funds.

Indicatively, selling 5% in a company valued at $2 trillion would mean a $100 billion liquidity check to the Saudi government, or enough to fund the country's reserve outflows for at least year, and perhaps as much as two - a period of time that would be sufficient to put virtually all marginal shale producers, as well as a Venezuela or two, out of business.

In conclusion, keep a close eye on the Saudi capital raising plans, especially if they involve privatizing even more state assets: if that is the route the crown princes have decided to take, then Saudi just found a brilliant loophole to its near-term liquidity troubles, one which will surely lead to its victory in the global race to the crude bottom.

There is really just one key question: who would buy this IPO?

 After all, not a single oil-exporter would sign up for this (they would be handing over money to their own executioner) while US firms would indirectly be crushing their own parallel investments in shale and its numerous derivatives, with who knows what unintended consequences as the shale bankruptcy wave finally strikes.

Then again, for the "really rich people", a $50 or even $100 billion check is nothing at the end of the day. It is, however, a huge political statement, one which may serve as the foundation of a new post-petrodollar axis. We, for one, are extremely curious to find out just who ends up paying it.

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Element's picture

 

 

"The trouble with our liberal friends is not that they're ignorant; it's just that they know so much that isn't so."

          - Ronald Reagan, former US President

 

"We will know our disinformation campaign has succeeded when everything the American people believe is false."

          - William Casey, former Director of the CIA

 

 
           Ronald Reagan appointed William Casey Director of the CIA.

knukles's picture

Fuck yeah.  IPO it then re-nationalize it when things get better.
They'll simply be using the Russian model which created the Oligarchy!
Been there, done that.

Who's book manager?  Not Goldman, or aren't they Jewish enough again?  OK, JP Morgan and Morgan Stanley, the White-shoe boys.

38BWD22's picture

 

 

JUST what I was thinking, knukles.

If Exxon, Shell, BP et al were to buy in, they would just have to sell it back once oil gets back to $120.

MIGHT stabilize the Saudi economy for a while though.

PAPA ROACH's picture

Do they really think they will "put shale out of business"? I have news for them, they won't. EVER. They might bankrupt a few players, delay some activity, but the asset will always produce. Do they really think that shale will just cap, abandon and go away forever? The asset will only change hands, and now has learned how to be more efficient, meaning the breakeven costs have been lowered substantially.

Mark this down as one of the most idiotic strategies ever devised on any level.

NoDebt's picture

The only thing I see saving oil at this point is a World War.  Which should be coming up shortly.

Just think of all the glorious economic benefits of a war!

balolalo's picture

I wouldn't trust a crown prince farther than I could throw'em.  

I wonder how the Saudi population will like their new foreign overlords/share holders as the economy keeps crumbling and more and more of their "national" oil wealth is transfered out?

Especially as the proxy and outright wars drag on...  

This looks like the beginning of a fire sale.  

ZerOhead's picture

The Saudis are probably going to sell the oilfields to the Saudi Royal Family and some Khazar friends just to tidy things up.

If they were smart they would sell it in Saudi riyals so that the inflation caused by the issuance of $2T in riyal debt out of thin air would make the purchase a give-away...

Derezzed's picture

I lol'd ... wahabii extreme islam orthodox prudes meet Wall Street coke hookers addicts sold their soul to the devil.
Disgonnabegood !!!

Thought Processor's picture

 

 

What great timing.  Wait until the oil fields are all virtually depleted, water injected messes, then float a major chunk of the company that owns everything there oil related in order get out of said used up investment.  Nice.  

 

Who came up with this plan?

 

And who is stupid enough to buy this crap?

 

The Sauds are done.  Stick a fork in em.  The last gasp effort to grab and hold new oil territory has been a failure.  Everyone can see this for what it is.  

 

Oh and if the Saudis are screwed then so is western control of oil pricing and then by extension the petro (USD) dollar.  This is what is really currently unraveling.  The elephant in the room so to speak.  And it's a big one.

johngaltfla's picture

Relations of mine worked for ARAMCO.

Their comment?

It's more corrupt and inept than the .gov.

If that stock hit the US tape, I'd short that more than a dwarf tossing convention.

HowdyDoody's picture

Aramco IPO? Saudis are trying to sell to a greater sucker before the Saudi oil production collapses.

 

Hope Copy's picture

that IPO would be so 'clouded'.. it would be better if they just gave it back to the companies the took it from

Luc X. Ifer's picture

what else to expect?! they are arabs - arab by definiton means that things - just ask any non arab who grew in their vicinity and had to learn them.

Hope Copy's picture

second that (no hearsay second hand)

Luc X. Ifer's picture

Agree. This is what wanders my head for some weeks. Indeed, all the current mess in the ME is to cover that in fact The Saud run over the peek oil - no that Russia must be collapsed, and the reserves are so badly depleted that only a war can still keep the truth far from being acknowledged. That would be the death of petro dollar as everyone will jump into buying from guess who - Persia and Russia. That will skyrocket  Russian's and Persia's wealth and basically change on very short notice the whole global power scheme. 

Hope Copy's picture

Blame Putin.. remember what he said in Brisbane 2014

azusgm's picture

This should go over great with the rest of islam (/s). Those nice islamic State boys have already made quite public their greivance with the Saudis for cooperating with infidels in their oil enterprise.

Long halal popcorn!

IRC162's picture

Don't overexert yourself Balolalo.  In reality, you only need to throw him just far enough to break through the pane of glass on the 72nd floor. Sir Isaac Newton will take care of the rest

JungleCat's picture

It's 3:30 P.M. and the Dow is down 400+.

Where is the Plunge Protection Team?

Harnar's picture

They were right on time. S&P 500 at 1939 at 3:30. Now at 3:40 1947. But it feels wierd today. I'm selling before 3:45.

Early Retirement's picture
Early Retirement (not verified) Harnar Jan 7, 2016 5:45 PM

good sell

knukles's picture

Timmah, who was on a guided tour of the newly refurbished trading floor, locked himself in a stall and they're trying to get the little bastard out before 5:00.

Grandad Grumps's picture

They only use the PPT for the "pump" phase of the scheme.

robertsgt40's picture

Make sure to get goldman to help you put the deal together.  What could possibly go wrong?  Ask Greece 

Soul Glow's picture

Whatever happens with the House of Saud someone get the 3:30 ramp going already!  Day traders are dying out there!

KnuckleDragger-X's picture

Very little can surprise me, but tis one takes the cake and I can't wait to see how they go about doing this. I reccommend getting your assole resized to super extra-large if you invest in this.......

Automatic Choke's picture

SA going under will be a major discontinuity in world politics.  Look for a rather large instability as everybody grabs for what is left, mainly the oil.  Even with diminishing reserves, they still have the lion's share of remaining world petro reserves, and the low prices are only determined by the margin - which right now is tilted towards production glut.  World storage is a pretty small amount relative to yearly world consumption, however -- it is key to remember that oil is a FLOWING commodity, not a storage one.  Discontinuity in SA and interruption of their production will tilt the margin back towards shortage.  Oil prices will skyrocket, and the "glut" of US fracking production is not sufficient to make up the difference.  I keep stockpiling barrels (etf-wise), and will continue to do so.  We are living in interesting times.

Thought Processor's picture

 

All about price control and the petro dollar.  If they cannot act as the swing producer they can not control pricing.  No control of pricing means someone else controls pricing (ie: Iran, Russia et al).  Doesn't that mean that by extension they have control over what currency oil is priced in?  Like pulling out the rug from under the USD and the US economy.

reinhardt's picture

big on quotes ehh

 

“The only thing new in the world is the history you do not know.” ? Harry S. Truman It is easier for the world to accept a simple lie than a complex truth. Alexis de Tocqueville r https://enronnext101.wordpress.com/ btw: your reagan/casey quotes are good - and memorable tks
roisaber's picture

They must be out of oil, and looking for somebody to hold the bag.

mkkby's picture

That was my first thought as well.  Plus only allowing 5-10% public keeps control in the king's hands.

Who would buy such a thing?  Mr. Yellen, of course.  The whole point is to let them keep pumping until Russia runs out of reserves and has to retreat from Syria/Ukraine.  This is not about money, nor even about oil -- it's about the global chess game.

 

cro_maat's picture

Oil is fast becoming irrelevent. There are a host of technologies coming online that TPTB cannot stop such as Thorium and Cold Fusion. Plus the fact that oil is abiotic and Peak Oil was a giant psyop makes it a good time for the Saudis to sucker in some greater fools.

OutaTime43's picture

Cold fusion is a fantasy. It is net energy negative and always will be due to the laws of thermodynamics. Thorium?... It does work but the anti nuclear energy freaks won't allow it.

Abiotic oil is absolute insanity. Oil comes organic sources.. Hence the Carbon atoms. Peak oil is aboslutely real. As real as the science of geology.

The reason why the Saudis are "going public" is beause the oil pit is starting to dry up. They'll unload all those shares on the unsuspecting suckers and run. While the investors watch their  oil extraction rates slowly erode.

cro_maat's picture

Thorium is being deployed in China and Norway and there is 10 times more thorium than uranium.

Cold fusion has been patented and even the US Navy has to reveal some of their research or be left behind. There are other technologies that will come out in the next few years that have been suppressed.

Peak oil may be a reality longer term but it is a non-sequitor because oil will be relatively irrelevant in 10 years.

Lower Class Elite's picture

And you didn't even mention the new breed of golden unicorns that shit Skittles and piss pink lemonade! We are saved! Party on, bitches!

RafterManFMJ's picture

I agree with Thorium, agree somewhat with abiotic oil (agree it's true, but the replenishment rate may be to slow to matter) and am skeptical of fusion.

Fusion is only 5 years away, and has been for 40 years.

Hope Copy's picture

methane > ethane > butane + alcohol >  gasoline  happening now (subsidized)

azusgm's picture

Heard a Jim Willie interview earlier this week. He is convinced that the Saudis are pumping full out because they need the cash. Disrupting the Russians and Americans comes in at a distant 2nd. He said that Ghawar is producing 97% water now.

Here's something I found.

http://peakoilbarrel.com/closer-look-saudi-arabia/#more-3171

Karlus's picture

I dont agree. I think Big Oil would love to get a piece of this. Saudis shoulda IPO before they decided to go OilWells Gone Wild and dropped the price. With the big money they got, they could easily buy back the devalued shares and LOL.

 

Doing an IPO at $33 oil is really dumb. Everyone and their dog knows it will recover, but now, you have let outsiders into the Aramco bubble. Bad idea for Saudis, great idea for Shell/Exxon

knukles's picture

Classic Gordon Brown Trade

conscious being's picture

Producing the famous Brown Bottom.

Aubiekong's picture

Paper shares that one day with a stroke of a pen could be outlawed and made worthless when the king changes his mind...

arbwhore's picture

Why not just execute the royal familiy... all 10,000 of them. Problem solved.

oddjob's picture

Things could get choppy.

Hope Copy's picture

multiply that by 5 or 6

DollarMenu's picture

 

Sounds like they've sucked the oil fields dry and now want to cash out.

Automatic Choke's picture

oil fields don't turn off suddenly....it diffuses through the rocks.  production rates drop, but you can keep pulling lower flows out for years.