Saudi's Confirm Plans to Float 5% of Aramco's Parent Company's Shares as Early as Next Year

Saudi Deputy Prime Minister Prince Mohammed bin Salman laid out his vision for the Public Investment Fund ("PIF") over a five-hour conversation, indicating plans to IPO 5% of Saudi Aramco's parent company's float as early as next year, or by 2018 at the latest, in a move to diversify the nation away from oil. According to the current strategy, Saudi will sell shares in Aramco's parent and transform the oil giant into an industrial conglomerate. With this move, the PIF will eventually control over $2T (some estimate $2.5T) as part of the Kingdom's initiative to wean itself off reliance on oil. The IPO could happen as early as next year, or by 2018. 

The PIF is going to absorb Aramco and its ownership and they’re going to float 5% of the Aramco parent on the bourse.

To illustrate the magnitude of the deal, post-IPO the PIF would dwarf the likes of Alphabet/Google, Microsoft, Amazon, Tesla, and Warren Buffet, combined. Into that fund (the PIF) is going to go Aramco, they already have their Industrial Arm inside it, and they're also going to get into some other businesses, buying land and properties and other assets. And it's already twice as large as any other sovereign wealth fund.

"IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,"

the prince said in an interview that ended Thursday at 4am.

"What's left now is to diversify investments. So within 20 years, we will be an economy or state that doesn't mainly depend on oil."

The state may have other goals in mind than simple profitability for shareholders. And while I appreciate the young Saudi's strategy and commitment to diversify the nation, I hardly think the Saudi's floating of 5% of the Aramco parent will relieve the state from its reliance on oil for government revenue. Call as it you will, but Aramco will still be wrapped into the PIF, and those shares represent ownership in an oil-driven business. Thus, their value (and in turn the value accruing to the PIF) will nevertheless depend on the price of oil. 

Some of the fund’s liquidity from share sales will go into emerging markets oil operations, some will go into land and property investments internally, and the Saudi’s will build a very large construction operation, according to the deputy prince. With the PIF fully up-and-running, the Saudi’s intend to create more industries internally, such as healthcare, and also look to gain further exposure abroad.

Considering the abysmal share of Aramco’s parent planned to be opened to the public, coupled with the points I mention above regarding the degree to which the move would actually relieve the state from oil reliance, the true incentives underlying the latest announcement and plans for Aramco appear questionable. But for anyone considering investment, what’s important is whether Aramco would warrant a valuation akin to its privately run counterparts. As a State Owned Enterprise (SoE), operations are likely far less efficient relative to those run in the private market. Moreover, you don’t get the same sort of transparency from SoEs as you generally would in the public markets. Finally, prior to the Saudi’s offering up any float, its reserves data has only been released by the Saudi’s themselves. Prior to any IPO, those reserves would be required to undergo a rigorous audit, which could create other complications.

While Brent crude traded down 2.4% after the interview, I see little to no fundamental connection here. Irrespective of any 5% ownership transfer in Aramco, global oil supplies continue to exceed demand, leading to a major supply glut. While development expenditures have been cut to a degree in the U.S., output has not. Put simply, a minor change in ownership of the Aramco parent should not be expected to drive any major changes in global oil supply and demand dynamics.