The question that many oil traders were asking for the past two years - and certainly all of Wall Street's investment banks - was answered moments ago when the WSJ reported that as some had predicted, Saudi Arabia has decided to scale back its ambitions for a public offering for oil giant Aramco, either on the NYSE or elsewhere, and instead is moving ahead with a listing next year solely on the Saudi stock exchange while taking more time to decide if an international venue is worth it.
The news, which means Wall Street banks will make several hundred million less in IPO proceeds this year by not taking public the Saudi company which by some estimates was worth $2 trillion and had hoped to raise up to $100 billion, followed a Bloomberg report from last Friday according to which "Aramco said to get cool response on IPO from U.S. investors."
While the original Bloomberg story was mysteriously taken down, what it reported was spot on: there was simply not enough demand for what would have been the world's biggest IPO - at least, not at the $2 trillion price tag demanded by the Saudis.
At the informal dinners and meetings in New York, Houston and Washington, investors pushed back at several aspects of the deal, the people said, asking not to be identified discussing private meetings. Among the issues raised were the $2 trillion valuation Saudi Arabia wants for the world’s largest oil producer, the scale of dividends Aramco’s prepared to pay and the impact of the shale boom on oil prices over the next few years.
Aramco said in a statement it wouldn’t "confirm or deny whether such meetings took place." The company added its policy is not to provide running commentary on the course of the IPO.
Saudi Crown Prince Mohammed bin Salman, who’s made the IPO a key part of his ambitions to ready the economy for the post-oil age, is preparing to visit the U.S. for a trip that will include a White House meeting with Donald Trump on March 20. Trump has said that he’s keen for the listing to come to New York, which is vying with London and Hong Kong to win the international portion of the share sale. Prince Mohammed is set to travel to Houston, America’s oil capital, as part of his U.S. trip.
Meanwhile, Saudi Crown Prince Mohammed bin Salman landed in Washington on Monday to begin a two-week cross-country trip to try and lure more foreign investment to the kingdom.
Compounding the difficulty of floating the shares in the US, Saudi officials had also reportedly been wary that offering shares in the US could pose legal risks. Last week, we reported that the IPO had been delayed until at least 2019 - and could even be shelved indefinitely. The Kingdom had reportedly selected New York, London and Hong Kong as the three "finalist" venues for the offering.
The offering was meant to be the centerpiece of MbS's "Vision 2030" initiative, meant to diversify the Saudi economy away from its dependence on oil exports and guest workers.
Some Saudi officials who spoke with WSJ questioned the rationale of a Saudi-only listing...
"If you are doing Tadawul only, then you are changing the original message and pitching it as a way to give Saudis a chance to own a slice in their state bank. That’s totally different from what [the Prince] said first about the IPO," the official said.
As WSJ pointed out, top Saudi officials had started making the nationalist case for listing on the Tadawul in recent weeks, with the country's oil minister saying it would be a "catalytic" event for the country's nascent markets.
"The only thing we know today is that the Tadawul will be the key listing location," said Saudi oil minister Khalid al-Falih to CNN this month. "An Aramco listing on the Tadawul will be catalytic for that capital market."
Still, some worry that the Tadawul isn't developed enough to handle the massive trading volume that floating shares of Aramco - widely believed to be among the world's most valuable companies - would require. The market capitalization of all stocks trading on the Tadawul is nearly $480 billion, compared with Aramco's valuation of between $1.3 trillion and $2 trillion. Furthermore, Tadawul hasn’t yet been added to benchmark indexes such as the MSCI and the FTSE Russell, meaning that, by listing domestically, the shares will miss out on the (incredibly powerful) boost that accompanies passive flows.
Even a Tadawul listing could present problems for Aramco and the exchange itself, as it is a small venue and it is unclear whether the internal controls and technology could support large-scale trading that would come with listing a company as big as Aramco. The domestic listing is unlikely to happen by October, a deadline Saudi officials set last year. Officials and people close to the process say April 2019 is likely the soonest a local IPO could go ahead.
For what it's worth, Aramco said in a statement that it's still reviewing "international options."