Aramco IPO's Window Has Closed

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About: Saudi Aramco (ARMCO)
by: Robert Boslego
Summary

Al-Falih removed due to resisting Aramco IPO.

Oil price collapse 2014.

2020 market outlook grim for oil.

Iranian sanctions may also be lifted.

The window for IPO has closed.

In the aftermath of the ‘removal’ of Khalid Al-Falih as Chairman of Aramco (ARMCO) and energy minister of Saudi Arabia, it has been reported that Crown Prince Mohammed bin Salman (MbS) moved him aside due to his resistance to moving the IPO forward. However, the current outlook for 2020, and the price collapse beginning in 2014 implies that the window for a successful IPO, with a potential $2 trillion valuation of Aramco, had closed in 2011-2014.

Oil's descent from being a highly valued component of the global economy to having a status on par or below that of the tobacco industry…Many large investors such as pension funds, sovereign wealth funds, and hedge funds have been turning away from oil companies and other nonrenewable energy firms. “ - Philip Verleger.

2020 Outlook

OPEC, the International Energy Agency (NASDAQ:IEA) and the Energy Information Administration (NYSEMKT:EIA) have each updated their forecasts in September for 2020. The outlook for OPEC is grim.

According to OPEC’s own calculations, the “call” (demand) for OPEC crude oil in 2020 is estimated to be 29.4 million barrels per day. During the first half of 2020, demand is projected to drop below 29 million.

OPEC’s production during August was 29.741 million. And that was with over-compliance to its agreed-upon cuts estimated to be 136%.

The IEA estimates that the demand for OPEC oil will drop to 28.3 million in the first half of 2020. It estimates non-OPEC production will rise by 2.3 million barrels per day, while global demand will gain 1.3 million.

The EIA estimates that OPEC will supply 29.6 million barrels per day in 2020 and that global stocks will build by 67 million barrels, or about 183,000 b/d. Therefore, its demand for OPEC oil is also about 29.4 million, the same as OPEC’s estimate.

Iranian Flood

President Trump fired his national security adviser due to his opposition of potentially easing sanctions on Iran and a possible meeting between Trump and the president of Iran, Hassan Rouhani, when he comes to the United Nations on or about September 23rd. I expect that Trump will secure some deal with Iran prior to the 2020 presidential election cycle which would result in the end to sanctions.

REUTERS/Satish Kumar/File Photo.

Based on EIA estimates for Iran’s production, that development would put another 1.7 million barrels of oil on the market. Asked about that possible development, Prince Abdulaziz, the new Saudi energy minister said follow the meeting of OPEC’s Joint Market Monitoring Committee, "If [Iran's production increase] happens, we have discussed this issue, and we are willing to attend to this issue when it happens.”

Conclusions

Against this backdrop, it is no wonder why MbS wants to get the Aramco IPO launched as soon as possible. However, I do not foresee any way in which it could achieve the $2 trillion valuation under these market conditions. And no venue outside of Saudi Arabia has even been selected. Once one is, time is required to implement the listing.

My conclusion is that the window for the IPO has already closed. MbS himself cannot be blamed though. He was still in his 20s back in 2014 and was not the crown prince.

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.