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Signs are emerging that the still continuing IPO boom in the Gulf could be reaching its zenith. Lower oil and gas revenues as a result of falling Brent crude prices, headwinds for the global economy, high inflation in the U.S. and Eurozone, and ongoing central bank interest rates hikes are not only pressuring energy markets, but may also negatively impact proposed IPOs in hotspots Saudi Arabia and UAE. As mentioned last week following Aramco’s impressive yet comparatively lower profits and revenues than those in Q1 2022, it is possible that Arab nations may see their oil and gas revenues shrink in the near future. Currently, the prices of crude oil, natural gas, LNG, and petroleum products are still experiencing downward pressure, which does not bode well for optimistic public spending plans of the Arab world. The world’s largest oil company has surprised the market by delaying the expected initial public offering of its energy trading business. The IPO was eagerly anticipated, with a targeted valuation of approximately $30 billion, and was expected to be one of the biggest share sales of 2023. However, no specifics have been given on a new timeline for the listing, and the ongoing slowdown in Aramco’s activities suggests that current market developments are not seen as promising. By postponing the IPO, Aramco is also indicating that the markets are too volatile and that there is no real expectation of an upward price trend in the short term. While a potential 2024 deadline for the listing could partially shock the market at present, it could also be viewed as a glimmer of hope, given that Saudi Arabia and its OPEC partners have a deeper understanding of real market dynamics than most.
Officially the reason for the IPO listing delay is that Aramco and its advisors are worried that the Riyadh Stock Exchange could not handle the volumes rightly. Looking at other IPO activity in the region, the official reason looks invalid, but the Saudi internal decision-making process is more often than not quite opaque. Another reason given by insiders is that Aramco is looking to further integrate its trading unit with its U.S. refinery business Motiva Enterprises, which is fully owned by Aramco.
The surprise move by Aramco is not the only one, as ADES International Holding, a Saudi drilling giant owned and backed by the PIF and with Saudi Aramco as its main client, has also postponed its planned IPO in the second half of 2023. The targeted valuation for the IPO was $1 billion. ADES was created by merging the Egyptian drilling company ADES with a long list of acquisitions and is still undergoing significant integration processes, which have not gone smoothly. However, given the direct link between ADES and Aramco, as well as its financial backers, an IPO could still be successful. Nevertheless, due to the uncertainty in the markets, delays are to be expected.
So far in 2023, almost no IPOs have been listed in Saudi Arabia. In the meantime, in the UAE, the heat is still on. In 2023 Saudi Arabia registered only a value of $72 million in listings, peanuts in comparison to the same period in 2022 when a level of $4 billion was reported.
Bloomberg has reported that the IPO market in the Gulf has returned to its pre-boom levels. So far, IPOs in the region have raised approximately $3.5 billion, a 70% decline compared to the same period in 2022. The region’s IPO market has cooled due to global economic pressures, uncertain Chinese economic growth potential, lower oil and gas revenues, and increased spending in Saudi Arabia, UAE, and Qatar. As a result, investor appetite has waned, and regional share prices have shown weakness.
The UAE may be the exception. This week, news emerged that ADNOC Logistics & Services, a global shipowner, is still interested to go public by June on the Abu Dhabi Stock Exchange. Around 15% of its holding, or 1.1 million shares, will be offered during an IPO. The total is slated to value the IPO at around $4 billion.
IPO delays are not uncommon when markets are underperforming or threats emerge on the horizon. However, for Gulf Arab economies, these IPOs are crucial to their ongoing economic diversification plans. Monetizing state-owned assets through IPOs allows for additional financial resources without increasing debt on balance sheets. The money raised is partially needed to support or outright finance economic ambitious diversification projects, particularly in Abu Dhabi and Saudi Arabia. If Riyadh and Abu Dhabi aren’t able to raise the money through IPOs such as Aramco’s or ADNOC Gas, alternative paths will need to be taken, which may be more expensive than originally planned. A significant slowdown in IPOs would result in higher costs for Saudi Vision 2030 projects or ADNOC’s decarbonization efforts, and it would also erode confidence in the overall economic outlook.
Taking a helicopter view of the above, the only other option for these two OPEC giants is to take action to further tighten oil markets in a bid to stabilize crude prices. Despite the risk of a new showdown with the West, India, and China, OPEC’s leaders will be considering all their options to maximize oil revenues in order to balance their fiscal budgets.
