Fitch positive on Saudi Arabian Oil Company's investment in Petronas' RAPID project
DALLAS: The logic for a $100 billion initial public offering of oil giant Saudi Aramco is going up in smoke.
The state oil producer of Saudi Arabia is considering pulling its planned float, the Financial Times reported on Friday.
With oil prices under pressure and oil's presiding cartel potentially extending cuts, the Saudi oil company’s IPO always seemed a stretch.
While private capital remains abundant, there is little purpose to all the hand-wringing.
The timing of the sale – a pet project of Crown Prince Mohammed bin Salman – was hardly ideal.
Saudi is embroiled in a bitter diplomatic feud with neighboring Qatar, which has undermined investor confidence in the region.
Valuation is a problem too. The prince thought he could raise 5 percent of a mooted $2 trillion valuation – an imprecise number that quickly became the company’s target.
According to a Breakingviews calculation, oil prices would have to trade at around $80 per barrel over the next decade – a roughly 45 percent premium on Brent’s current value – to achieve this windfall.
Stubbornly low oil prices are both a reason to raise capital, and a reason not to. Not only is every barrel of oil less profitable, production could be cut further too.
On Thursday the International Energy Agency said there was “little doubt” leading producers would recommit to supporting the process of rebalancing, and traders largely expect the Organization of the Petroleum Exporting Countries to extend cuts, according to Reuters.
Even if that works, Saudi would be trading higher prices for lower volumes - which would have an impact on Aramco's value.
Shelving Aramco's IPO would be a blessing in disguise for international cities including London, where regulators, exchanges and politicians are at sixes and sevens over whether to bend rules to attract the listing.
Meanwhile, private equity, sovereign funds and private investors are overflowing with cash but have few targets. Aramco might yet dip into a new pool. - Reuters
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