Saudi Aramco has confirmed its position as the world's most valuable public company.
Shares in the oil producer jumped on their second day of trading, touching the US$2 trillion ($3t) valuation so coveted by the kingdom's crown prince, Mohammed bin Salman. It is certainly an achievement.
At US$2t, it is worth more than technology giants Apple and Microsoft, and bigger even than the top five oil companies — ExxonMobil, Total, Royal Dutch Shell, Chevron and BP — combined. In nominal terms, it is the ninth largest economy in the world.
But these bragging rights are misleading. When the crown prince announced he would take Saudi Aramco public he promised the move would create more transparency.
The kingdom's national champion would be subject to a greater level of scrutiny than ever before. It would help to bring foreign capital into the country — a symbol of its opening up to the world. In practice, he has achieved a pyrrhic victory, one achieved through a mixture of coercion and stage management.
By any measure, this has not been a normal listing. The level of state interference in one of the most well-run organisations in the kingdom has been unprecedented.
At every turn, the crown prince and his advisers have sought to determine the price of the offering rather than leave it to the market: wealthy Saudi families have been pressured to buy shares; banks have had to issue loans to retail investors; funds in the kingdom and regional allies, including Abu Dhabi, were asked to bolster the sale after plans to market the listing globally were abandoned. The size of the original stake had to be scaled back to 1.5 per cent.
Khalid al-Falih, energy minister and chairman of Saudi Aramco since 2015, was pushed out in September. He had privately warned of the negative exposure the listing could bring. The brutal killing of journalist Jamal Khashoggi a year ago has also continued to hang over the prince's reformist credentials.
The company's pricey valuation must also be considered against the backdrop of rising concern over climate change. Its shares started trading just as world leaders were meeting in Madrid for UN climate talks. Many believe the oil and gas industry is living on borrowed time. US major Chevron earlier this week wrote down the value of its assets by US$10 billion — a seeming admission that not all fossil fuel will be profitable any time soon.
As the world's lowest-cost producer, Saudi Arabia believes it will be the last one standing amid the global shift towards cleaner fuels. With oil demand set to decline long-term, Saudi Aramco therefore represents a better financial bet than many of its peers even as it is responsible for more carbon emissions than any other company.
But for potential investors there is a catch: if oil prices rise above US$70 a barrel — the Brent crude benchmark is currently trading at US$63 — the company's profit growth will diminish as royalty payments to the government increase substantially.
For the kingdom, there is a bigger prize at stake; the listing is at the heart of the crown prince's Vision 2030 plan to diversify the economy and reduce the country's dependence on oil. Major national projects have been promised that will offer jobs to the millions of young Saudis entering the workforce.
Figures on foreign direct investment underline the challenge; although it picked up to US$3.2b last year, up from US$1.4b in 2017, according to UN data, that is less than half the FDI secured in 2016. The creation of jobs and economic growth will be the true test for the kingdom's vision. The risk is those promises of reform could ring as hollow as the US$2t price tag.
Written by: The editorial board
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