Case

In 2015, the government of Saudi Arabia announced an ambitious plan, known as Vision 2030, to diversify the economy beyond oil. Saudi’s plans to modernize its economy will require copious funding, something that twill strain the finances of the desert kingdom. The country relies heavily on oil, with 87 percent of the budget, 42 percent of GDP, and 90 percent of export earnings being derived from oil revenues. As a consequence of lower oil prices and higher government outlays, the Saudi government has recently been running large budget deficits. In 2016, the deficit hit $90 billion, or 13 percent of GDP. To raise the funds for Vision 2030, therefore, the government decided to sell of shares in Saudi Aramco, the state-run oil company that has exclusive control over Saudi Arabia’s oil reserves.

Saudi Aramco is one of the largest enterprises on earth. Saudi Arabia possesses about 16 percent of the world’s oil reserves, including some of the lowest cost reserves on the planet. This gives Saudi Aramco 10 times the reserves of the largest private oil company, ExxonMobil. Saudi government estimates suggest that Saudi Aramco is worth $2 trillion. Based on this valuation, the government is proposing to sell 5 percent of the shares of Saudi Aramco to private investors, which would raise $100 billion in capital for the government- enough to fund aggressive investments in non-oil ventures to support Vision 2030. If this comes to pass, the initial public offering (IPO) of Saudi Aramco will be the largest in history by a wide margin.

Raising $100 billion in capital has its challenges, not least of which is that the Saudi stock exchange, or Tadawul, is far too small and illiquid to absorb such a massive stock offering. As it stands, the entire Saudi stock market only lists 170 companies and has a total market capitalization of around $350 billion. Offering 5 percent of Saudi Aramco through the Tadawul will not result in high prices for the stock; there is simply not enough local demand to support that. The only way to raise $100 billion is to offer stock of Saudi Aramco for sale not just on the Tadawul, but also on one or more additional large and highly liquid stock markets. The exchanges being considered include New York, London, and Singapore. For example, with a market capitalization of more the $20 trillion, the New York Stock Exchange is far more able to absorb the offering than the Tadawul. Listing on multiple exchanges will make the IPO available to a much wider pool of investors, thus potentially increasing demand and driving up the price, making it more likely that the Saudi government will hit its target of raising $100 billion.

If Saudi Aramco does list on larger exchanges, which seems highly likely, it will have to abide the strict accounting regulations and reporting requirements of those markets. Regular financial reporting will increase the transparency of Saudi Aramco, which in turn will increase investor confidence in the IPO and thus increase demand and drive up the market price of the stock. Another benefit of listing on multiple exchanges is that I will make it easier for Saudi Aramco to undertake additional stock offerings down the road and to issue debt securities in those markets. Right now, the IPO is being planned for 2018.

QUESTION 1: Why has the government of Saudi Arabia decided to sell shares of Saudi Aramco? What benefits does the decision offer the country?

QUESTION 2: What are the benefits of listing Saudi Aramco on a larger exchange like the NYSE rather than the local exchange?

QUESTION 3: Discuss accounting regulations and Saudi Aramco. Do you see any issues related to Saudi Aramco’s state ownership? How might things change for Saudi Aramco if it sells its shares on the NYSE?

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