Saudi Arabia’s $2 Trillion mystery

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2016 was a big year for Saudi Arabia: Amidst a slump in global crude prices, deputy crown prince Mohammed Bin Salman laid out his ambitious “Vision 2030” to move beyond oil and diversify the kingdom’s income sources. Although a slew of measures and initiatives were proposed, the show was easily stolen by the announcement that the crown jewel of Saudi Arabia’s industrial engine — The Saudi Aramco — would be opening its doors to outside investors in 2018 through an IPO for 5% of its shares.

Trouble in Paradise

With an estimated valuation of $2 Trillion, the Saudi Aramco is very often touted as “The world’s most valuable company”, well ahead of bigwigs such as Apple and Exxon. In the past, the company has accounted for up to 90% of the kingdom’s revenues. The growing global interests in green energy and an overall volatility surrounding crude prices, however, have put the company’s future in murky waters. The liquid cash generated from a sale of stake will help the kingdom jump start a much-needed investment drive focused on other industries. Yet, the whole issue is shrouded in mystery with a lot of important questions still left unanswered. The most important questions are as follows:

1) Valuation
One of the very first questions that the Saudi Aramco faces is the question of its valuation. The Saudi government has maintained the official valuation at $2 Trillion even as external investors and bankers are not so sure. EFG Hermes conducted a survey at an investment conference where nearly 39% of respondents stated that they believed the markets would value the company at a much more modest $1 – 1.5 Trillion range.

2) Long term value
As of now, the Saudi Aramco is still treated as a purely oil-focused company. The Saudi government has not made any comment on whether the company, post-IPO, will begin diversifying into other fields or if it will stay its current course. Either of these two scenarios brings up further questions:

-> In a workforce dominated by people who only possess expertise in the oil industry, how can the government find a talent pool that can handle non-oil sectors? Furthermore, if this issue is dealt with through the hiring of expats, would it not be in direct contrast to the “Saudization” strategy?
-> If the company stays the current course, what long term value will it actually? Oil is increasingly being seen as a resource whose days of commercial relevance are limited. A big part of the Aramco valuation stems from its massive possession of oil-related infrastructural assets. Should the Aramco continue to concentrate on oil alone, it would prove of no value to investors who hope to be associated with the company in the long term. What plans does the government have in order to product value to such investors?

3) Governance & Transparency
The Saudi Arabian government currently maintains complete control over the workings of the Saudi Aramco. The Saudi government is yet to give clarity on whether shareholders will be given any form of decision-making powers whatsoever. Furthermore, the company will be expected to address issues of internal bureaucracy and overall transparency since the company currently offers limited and controlled information to outsiders.

One year to take off

The Saudi Aramco IPO is a big gamble for the Saudi government as they stray away from the traditional path they have historically been associated with. With just a little over a year left until take-off, the government needs to reaffirm its allegiance to corporate transparency and ethics by addressing all concerns *before* the IPO lest they face the wrath of bad investor confidence.

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