Saudi Aramco’s IPO proceeds utilization
In the previous part, we discussed Saudi Aramco’s reserves. In this part, we’ll discuss the likely reason for Saudi Aramco’s IPO (initial public offering).
According to Saudi Arabia’s deputy crown prince Mohammed bin Salman Al Saud’s plans, Saudi Aramco’s ~5% stake will be held by the public. The remaining stake will be held by PIF (Public Investment Fund). The proceeds from the IPO will be invested by PIF in lucrative and distinct assets domestically and internationally.
PIF is a sovereign fund aimed at providing diversification of revenues to the Saudi government. According to Saudi Vision 2030, the crown prince aims to lower the kingdom’s dependence on oil as a major earning stream. To achieve this, investments are expected to be made in various assets and projects that will grow and earn profits and returns for the fund and the government.
Why the need for Saudi Aramco’s IPO?
Lower oil prices impacted integrated energy companies considerably. ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) witnessed around a 63% and 58% fall in their adjusted earnings in 1Q16—compared to 1Q15, respectively. BP (BP) experienced an even sharper decline of 80% in its adjusted earnings over 1Q15 in 1Q16. On the other hand, Chevron (CVX) reported a loss in 1Q16 due to the loss in the upstream segment, mainly led by lower oil prices. This would have also impacted the Vanguard Energy ETF (VDE). It has ~36% exposure to the integrated energy sector.
Similar situation for Saudi Aramco
Sinking oil prices shook petrodollar economies’ foundations. Saudi Arabia’s economy has also been impacted by lower oil prices. Saudi Arabia’s 2015 budget deficit stood at ~15% of the gross domestic product. Its foreign reserves have fallen steeply. The government plans to cut spending, raise revenues through taxes, increase private sector investment, and divest state-owned assets to bring down its deficit levels. It isn’t surprising that Saudi Arabia is considering an IPO of its behemoth state-owned organization Saudi Aramco.