Saudi Aramco IPO an offer too good to refuse

Saudi Aramco is getting ready to make its public debut on the Saudi Arabia stock exchange, and many participants are in on it because Crown Prince Mohammad bin Salman made them an offer they can’t refuse.

You see, in the vested interest of the Saudi government, the Aramco IPO, which is getting its first launch in Saudi Arabia, has to be very successful. That's because when they go to exchange outside of Saudi Arabia, the oil company will look more attractive.

To assure this success, it seems that the Saudi government offered a little — I wouldn’t call it coercion — but perhaps a friendly little, shall we say, invitation to invest a boatload of money from some of the many princes’ personal coffers. I wouldn’t say the Saudi government exactly used what you might call high-pressure sales tactics, but let’s just say that they made some princes an offer that they can’t refuse.


What makes this a little disturbing is that the first launch of this historic IPO should be a gauge of real investor interest and a metric of its real valuation. This is eventually going to be the world’s biggest public offering and so it is imperative to allow the market to value it fairly. Prince Mohammed thought a fair valuation would be in excess of $2 trillion.


Yet the $2 trillion valuation that Prince Mohammed was hoping to achieve for Saudi Aramco probably is not going to happen. That is despite the crown prince’s goal of jacking up oil prices by cutting production and his campaign to win friends and influence people in his charming and efficacious way.

According to some reports, the world’s biggest oil company may only be worth $1.5 trillion, or even less. Maybe way less, even less than $1 trillion.

That would be a major ego blow to Prince Mohammed, not to mention a few early investors. In fact, banks involved in the company’s initial public offering have offered wide ranges of the company’s real value, and according to one bank, it could be worth only $1.5 trillion, give or take a trillion.

Other banks, according to reports, suggested wide swings in valuation. And it isn’t just size that matters. At some point, investors want to see profits.

While it is said that Saudi Aramco is the most profitable company in the world, there are still going to be challenges.

JP Morgan Chase reportedly said that for Saudi Aramco to pay back all its goodies ad sweeteners, they would need an oil price of $64.2 a barrel to break even. As time goes on, after paying back all of the incentives, that break-even would get lower. That's assuming the company can pay back the losses for all of the time that oil dips below that amount. If oil fails to get to that level, will the stock continue to be attractive? It's currently priced at $57.44 per barrel.

If oil doesn't hit $64.2, that will come as a disappointment to some princes that were, sort of, shall we say, encouraged, to pump in millions of dollars to grab some shares.

This is not to say that the Saudi Aramco stock might be great at some point, but the best way for it to find its way is to allow the market to dictate its value. It should not be pumped up by millions of dollars of money that would not be there if it were not for a little crown prince muscle.