(Bloomberg Opinion) -- The weekend attacks on key Saudi Arabian oil facilities roiled oil markets, effectively knocking out 5% of the global supply and sparking the biggest intraday surge in crude prices on Monday. They also served to heighten geopolitical tensions and drawing attention to the vulnerability of core infrastructure to unconventional attacks.
As jarring as the assault and reverberations have been, they aren’t – on their own – enough to completely upset the global oil ecosystem. The supply of oil to global customers will largely go undisturbed, with state-owned Saudi Arabian Oil Co. tapping crude from storage to replace the missing oil for export as necessary while working as quickly as possible to repair and restore the damaged facilities.
Where these attacks may really harm Saudi Arabia is in the valuation of of the company in the lead-up to its planned initial public offering, for which it had been speeding preparations in recent weeks. The Wall Street Journal reported Monday that Saudi Arabian officials are considering delaying the stock sale and were waiting to get a full assessment of the damage from the attack before pushing any listing back. That would be a prudent decision, and may also provide an opportunity to rethink aspects of the IPO that may prove problematic.
Crown Prince Mohammed bin Salman believes that selling a stake in Saudi Aramco, as the company is known, is key to infusing Saudi Arabia’s new sovereign wealth fund with cash to make investments in non-oil sectors and diversify the economy. He has long said that he expects a $2 trillion valuation for Aramco, and while analysts have disputed the figure, the offering by the world’s largest oil company would still be one of the biggest on record. Bringing the IPO so soon after the attacks, though, could have a negative impact on Aramco’s potential valuation.
Risk managers and assessors have long known of the vulnerabilities and strengths of Aramco’s facilities and Saudi Arabia’s defenses. However, equity market participants may not. Aramco could – and likely will – impress with its ability to recover quickly. For at least 70 years, Aramco has prioritized quick repairs of damaged infrastructure, because each hour of lost production can equal millions in profit. Full production will be back to pre-attack levels soon, and full capacity will be returned eventually without anyone realizing it. Still, the attack is getting much attention outside of oil circles, and rightly so, because of the geopolitical implications and risks over which Aramco has no control.
Even before the attacks, Saudi Arabia’s plan for the Aramco sale raised some questions. The kingdom had decided on a two-part offering, with Aramco first selling shares on the local Tadawul exchange, to be followed by an eventual international listing.
Tadawul is a small exchange with fairly low volume; the addition of a company the size of Aramco could overwhelm the bourse. Moreover, Aramco is an upstream-heavy oil company, with the majority of its revenue coming from crude oil sales. As a result, the value of the company and the direction of Tadawul would be highly susceptible to large fluctuations based on the moving price of oil.
The attack laid bare Tadawul’s weakness as an exchange to host a company as large and as influential as Aramco. Immediately after the attack, Tadawul dropped 3%, before recovering somewhat, with analysts speculating the government may have stepped in to support the market. Had even 1% of Aramco shares been listed on Tadawul – which, based on a $1 trillion to $2 trillion equity value for Aramco would translate to a chunk worth $10 billion to $20 billion, or as much as 4% of the value of the entire exchange – the drop may have been even more precipitous and it is unlikely that the government would have been able to do much to prevent a crash.
A government effort to gain local support for Aramco’s Tadawul listing also has the potential to raise concerns among international investors. Bloomberg News reported last week that kingdom officials met with wealthy Saudi families to encourage them to invest in the Aramco IPO as anchor stakeholders, which could bolster the company’s valuation and ensure adequate demand. If or when Aramco does look to list internationally, investors may have their doubts about the valuation derived from the local listing when considering buying shares of their own.
Perhaps the Saudi government should let the company stand on its own merits and highlight its resiliency in the face of the damaging and dangerous attacks. Aramco already stands out, especially in an IPO scene dominated by tech companies, many of which have no profit on the horizon. It is a company with very strong financials, the largest profits in history and a robust strategy for long-term growth.
The attack provides the Saudi government with a valid reason to delay the IPO on the Tadawul and reassess what’s best for the company and the kingdom. That may be a concurrent offering of local and international shares, whatever the initial valuation.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ellen R. Wald is president of Transversal Consulting and a nonresident senior fellow at the Atlantic Council's Global Energy Center.
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