Saudis Considering Delaying Aramco IPO As Output Recovery Expected To Take Longer

On Saturday, Saudi Arabia promised that it would  provide much needed information about the scope and severity of its damaged facilities within 48 hours, yet has so far failed to do so, leaving commodity traders scrambling and dependent on rumors and innuendo, to evaluate just how long the output shortage would last and how much oil would be taken offline for at least a few days (and potentially as long as months).

In retrospect, it now appears that we won't be getting a detailed update any time soon because as the WSJ reports, the Saudis themselves have no idea what is going on, and are seeking "clarity on damage." As a result, Saudi Arabia - which last week was said to be fast tracking its Aramco IPO after numerous delays - is once again said to be considering a delay for the IPO of the world's most valuable company (its market cap is said to be $1.5-$2 trillion when it goes public), as the attacks have added "a fresh element of risk for international investors hoping to take part in Aramco’s initial public offering of stock", the WSJ reports.

Separately, Bloomberg reports that Aramco officials "are growing less optimistic that there will be a rapid recovery in oil production after the attack on the giant Abqaiq processing plant", although here too there is no official disclosure but rather "a person with knowledge of the matter" is the source.

All eyes are on how fast the kingdom can recover from the weekend’s devastating strike, which knocked out roughly 5% of global supply and triggered a record surge in oil prices. Initially, it was said that significant volumes of crude could being to flow again within days, but it may now take longer than previously thought to resume operations at the plant, the person said, asking not be named before an official announcement. The company is scheduled to provide an update later today.

While Aramco has been gearing up for a two-part IPO, in which it hopes to first sell a sliver of itself to investors on the local Saudi exchange, and then list shares internationally, the weekend attack puts into focus another new risk, unusual for most companies planning an IPO: the threat of more attacks that might bottle up production by cutting revenue and profit, or otherwise shake investor confidence in Aramco’s longer-term investment value.

The Aramco delay would also be a disastrous start to the new Saudi energy minister, MbS's older brother, Abdulaziz bin Salman, or AbS, who as we reported last weekend, unexpectedly replaced Khalid al Falih as the Kingdom's top energy official:

The attack also comes at a sensitive time for Aramco leadership. Khalid al Falih, who until recently led both Aramco, as chairman, and the country’s oil sector, as energy minister, was earlier this month relieved of those positions. Two officials untested by crises of this kind are now in charge: Yaser Rumayyan, who leads Saudi Arabia’s main sovereign-wealth fund, now heads Aramco and Crown Prince Mohammed bin Salman ’s older brother, Abdulaziz bin Salman, is just days into his new job as energy minister.

A delay is also bad news for all the banks that were recently tapped to prepare the market for the monstrous IPO.

Aramco’s valuation has been a point of contention between Prince Mohammed, who runs the kingdom’s day-to-day affairs, and some bankers. The crown prince and his banking advisers expect the IPO could value the company at roughly $2 trillion and finance an ambitious program to diversify the economy beyond oil. Other bankers and several Aramco executives say the company should be valued at closer to $1.5 trillion. A key metric had long been the price of oil.

Yet while an Aramco delay may be tactical, the strategic victory would be if the market reprice oil notably higher due to the return of geopolitical risk premium. To be sure, while a modest delay may be in the works, Riyadh will be more than happy to accept it if it means going public with Brent at $70, and thus with an Aramco valuation closer to $2 trillion, than Brent at $60 or lower, and the company struggling to make $1.5 trillion.

In other words, if all it takes to boost the company's valuation by $500 billion is a brief delay, then Saudi Arabia will be delighted to take it.