Saudi Aramco’s best-laid IPO plans just suffered a drone strike. In the last few weeks, the world’s biggest oil producer had seemed to be getting its stalled listing back on track by identifying a new chairman and naming a squadron of investment bankers to oversee a Riyadh stock offering. Saturday’s air attacks by Iran-aligned Houthi rebels, which knocked out over half Saudi’s national oil output, upend that.
The strikes on Aramco’s Abqaiq and Khurais facilities are a major escalation of previous Houthi drone launches, which were mostly directed at Saudi energy infrastructure and airports. Abqaiq alone processed 50 per cent of the company’s 10 million barrels per day crude oil production in 2018. Aramco’s maiden international bond prospectus in April identified the facility as critical for its financial condition.
The world’s oversupplied oil market has some scope to absorb a short-term shock. Developed economies’ oil stocks are above five-year averages, and the combination of a global economic slowdown and increased output by other countries means the Organisation of the Petroleum Exporting Countries is currently set to produce 1 million barrels per day more than is required to balance the market in 2020, Morgan Stanley analysts reckon. Even before the attacks, the cartel had faced pressure to consider deepening production cuts in place since 2016.
Yet while Saudi might welcome a coordinated reduction, it certainly won’t like Saturday’s massive and involuntary unilateral disruption, which Reuters reported on Sunday could take weeks to fix. Aramco might have to draw on the Kingdom’s 188 million barrels of reserves to maintain exports of 7 million barrels per day that mostly go to Asia.
The best case is that Aramco’s vaunted operational efficiency enables it to restore full production rapidly. In that scenario the $10 a barrel spike in oil prices that consultant Rystad expects might even help bump up the company’s stock market value, which Breakingviews calculates will fall well short of its desired $2 trillion. Yet the latest dramatic evidence of Aramco’s vulnerability, and the possibility of regional reprisals by the volatile Crown Prince Mohammed bin Salman, make it almost certain that international investors will apply a higher discount rate to its future earnings. That could make renewed impetus around the IPO look premature.