Saudi Aramco's True Value Is Still an Unsolved Mystery

(Bloomberg Opinion) -- Saudi Aramco’s initial public offering has endured many disappointments but it has at least turned the world’s biggest company into a listed entity subject to external scrutiny. How it handles its new responsibilities will be critical to Riyadh’s ambition to sell more of the shares to international investors. The to-do list is long.

A more open Aramco can only be a good thing, but much will depend on whether it embraces transparency (despite the Kingdom of Saudi Arabia owning almost all of the stock). The IPO process invited a global discussion about Aramco’s true value. The Saudis shut down that conversation by scrapping most of the international offering when they didn’t like what they were hearing. That doesn’t bode well.

Just 1.5% of the company was sold ahead of Wednesday’s market debut. A deal to sell another block to a sovereign wealth fund might happen at any time. But a lock-up precludes a share sale on the markets for a year. Aramco will, however, want to seek an international listing at some point; it has been exploring China or Japan as a next step, according to the Wall Street Journal.

The cooling off period before going back to global investors is just as well. A 10% jump in the stock price on Wednesday has pushed the company further away from the sub-$1.5 trillion valuation where non-Saudi buyers may have been comfortable. Genuine price discovery for Aramco shares will have to wait for at least six months. By then, incentives for domestic retail investors to keep their shares will have ended, index funds will have largely built their positions and any short-term hedge funds in the book will probably have cashed in — especially if the company ever actually hits its dream $2 trillion valuation.

In the meantime, Aramco’s personality as a public company will start to emerge. It can either provide the bare minimum transparency required by the rules for the Tadawul exchange, or aim to match the highest international standards. It can hold perfunctory earnings calls with little airtime for critical questions from analysts and investors, or it can engage openly and at length. The short market briefing that it held earlier this year doesn’t inspire confidence.

There are other impediments: Saudi Arabia’s lamentable human rights record and doubts over the pace of reform; and Aramco’s status as the world’s biggest and cheapest producer of hydrocarbons. Indeed, Aramco appears to see its role as being the last oil company standing as demand for crude falls.

The global investment community has heard the Saudis’ argument, but it’s more interested right now in seeing how oil companies can recognize and cover the full environmental cost of hydrocarbon production right through to when it’s burnt by the end consumer. Will Aramco ever fit this brief? Surely more than any other company, it can afford to set firm, time-dated public targets for reducing emissions. So far, it has not.

The Saudi giant missed out on its desired valuation and an international investor base. But it did become public. The test now is whether it and its dominant shareholder can engage with the scrutiny and criticism that comes with that achievement.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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