The Old Man Was Right: The IPO Was A Really, Really Bad Idea -- November 24, 2020

The old man: the king of Saudi Arabia. It's my understanding he was against this idea from the very beginning and only accepted it after imposing harsh conditions. Those harsh conditions are now costing the kingdom billions. At least that's my take.

Now, read what Simon Watkins has to say about the IPO.

Link here. 

The lede:

The initial public offering (IPO) of Saudi Aramco that was heralded by Crown Prince Mohammed bin Salman (MbS) as being a showcase flotation for raising massive new capital for the Kingdom and anchoring a major expansion of its international equities market presence has proven only to put Aramco into a debt spiral and highlighted a myriad of problems in Saudi Arabia to international investors. Now, Aramco is digging itself further into serious debt through bond issuances simply to pay for the huge dividend payments promised by MbS that were absolutely required to persuade anyone to buy into the omni-toxic IPO. At this rate, the debt taken on by Aramco and other Saudi bond offerings to pay for the dividends will be far more than the amount of money raised in the IPO. As a direct result of MbS deciding to go ahead with yet another oil price war at the same time as the COVID-19 pandemic was gathering pace and destroying demand for oil, Aramco’s finances have suffered a massive hit. For the first half of this year, the company saw a 50 percent plunge in net profit and at the beginning of this month, it reported another massive drop in profits of 44.6 percent for the third quarter, falling to SAR44.21 billion (US$11.79 billion) from SAR79.84 billion in the same period last year. On the other side of the balance sheet, though, is the stark fact that because the company’s IPO was so toxic on so many levels was that it was shunned by Western investors and had to be off-loaded to buyers who were either bullied or bribed into buying the stock Aramco is left having to pay massive guaranteed dividend payments for the foreseeable future to those shareholders. 

This huge guaranteed dividend payment of US$18.75 billion per quarter - US$75 billion for a full year – will have to be paid for through budget cuts over and above the US$15 billion in Aramco’s annual capital spending alluded to by Aramco’s chief executive officer, Amin Nasser, just after the first half profits figures were unveiled. This will take the total down from around US$40 billion to around US$25 billion. Further reports have stated that even this US$25 billion figure is set to be reduced by another US$5 billion, taking the total capital spending in this year from US$25 billion to US$20 billion. 

Whatever the cuts, it remains the case that the first two dividends together for the first two quarters of this year – US$37.5 billion – far outstripped Aramco’s total free cash flow of US$21.1 billion for the same period. The latest profits number for the third quarter, meanwhile, covers just 62.88 percent of the dividend payment, never mind any other expenses or investment for projects ongoing or planned that Aramco may have had in mind. To put this even more clearly: Aramco’s entire profit for the third quarter cannot even cover the dividend it owes for the same quarter, not even two-thirds of it!