A Peek Behind The Curtain: Saudi Arabia's Reported 49% Sale Of Saudi Aramco, Or Not

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Summary

A report indicates that Saudi Arabia will sell 49% of Saudi Aramco within a decade.

The report was subsequently retracted by Bloomberg.

The initial report aligned with our thesis that Saudi Arabia would sell large stake in Saudi Aramco, which incentives the country to drive oil prices higher.

We've been following Saudi Arabia's Vision 2030 program since its announcement as we believe it will drive the country's oil policies going forward. As we discussed previously, the changing Saudi Arabian demographics, coupled with an economy over-reliant on oil revenues and government employment, means that the current lack of economic diversity will be unsustainable in the near future.

The OPEC Algier's meeting to cut production, the Vienna, Austria meeting to allocate the cuts and the subsequent Dec. 9th meeting for non-OPEC members were all largely driven by Saudi Arabia's leadership and its need to bolster oil prices in time for the previously announced initial public offering (IPO) of Saudi Arabian Oil Co. (or Saudi Aramco) in 2018. This IPO is a cornerstone of the Vision 2030 program, as its the asset to fund Saudi Arabia's future.

We believe that the sale of Saudi Aramco will mean that Saudi Arabia will push for higher oil prices in the near to medium term. The IPO is simply Saudi Arabia's initial foray into the market, and portends future follow-on sales. In the coming years, we think Saudi Arabia will continue to bolster oil prices because the country will intermittently sell or borrow against the Saudi Aramco stake in order to capitalize/nurture its non-oil related sectors. Thus, it has every incentive to support oil prices as that maximizes the value of Saudi Aramco.

A Peek Behind the Curtain

Two days ago, Bloomberg (picking up a report by al-Eqtisadiah, a Riyadh-based newspaper) reported that Saudi Arabia plans to sell 49% of Saudi Aramco in the next decade.

Interestingly, a short-time later this story was retracted by the newspaper, and a statement published Sunday, said the story, which cited an unidentified government official, contained numerous errors. We surmise instead that the government official may have shared too freely. We also believe that the report was true and didn't contain "numerous errors" as reported.

It's likely that the report was retracted because if the IPO is a first step, and more sales are to come, it's in Saudi Arabia's best interest to keep the timing and size of the sales secret. First, because potential equity stakeholders may be hesitant to buy-in at the initial stages when they know the float of shares outstanding will later expand dramatically, and second, public knowledge of Saudi Arabia's specific plans weakens its leverage in any future OPEC/non-member OPEC negotiations to control oil prices.

As we work our way through the oil glut in 2017, and the focus shifts to how effectively the oil cut participants are in following the Algier's agreement, know that Saudi Arabia's Vision 2030 and the sale of Saudi Aramco will loom large going forward. The success of the program will determine largely how effectively the country's monarchy can govern, and all of this means oil prices may go higher. We've just received a glimpse of what's behind the curtain before it was abruptly closed; and we've little doubt that we saw a Vision 2030 wizard at the controls.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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