Opinion: why Saudi Aramco’s 658-page IPO prospectus comes up short

A dozen of the 658 pages in the just-published Saudi Aramco prospectus list the banks, law firms and consultancies midwifing this gargantuan IPO.

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Much further back, you will find the third-party certification of the company’s oil and gas reserves. Including the cover letter and two sets of signatures, this clocks in at 10 pages.

If that strikes you as a tad unbalanced, consider the IPO of another state-owned energy behemoth, Rosneft Oil Co.

The third-party assessment of the Russian oil champion’s oil and gas reserves published in its 2006 prospectus runs to 135 pages, incorporating detailed field-by-field analysis of reserves, pricing and different scenarios.

To be fair, Saudi Arabian Oil Co has another 16 pages of more qualitative material on its upstream operations under the business-description section; on the other hand, that bit ran to more than 50 pages for Rosneft.

True, Rosneft’s upstream business was a somewhat complicated affair given its then-recent, er, bargain acquisition of what had been Yukos. Still, it just isn’t a good look that, despite seeking a valuation 15 times Rosneft’s current enterprise value, Aramco has chosen to publish an upstream assessment that looks like a pamphlet in comparison.

Sometimes, it’s the stuff that doesn’t make it onto the page that can end up defining a great work. Aramco’s refining and chemicals operations could also use more detail.

The prospectus provides high-level, combined financial numbers for these businesses, as well as for their major joint ventures and associates.

It also provides high-level data on overall production of refined products and chemicals, including throughput at major refineries. This is all good. But in terms of getting at the underlying economics of the businesses, especially margins, it leaves much to be desired — or, in modeling terms, assumed. Again, even Rosneft provided per-unit costs for its refining business, as well as realized pricing for products.

Refining and chemicals amounted to less than 2 percent of Aramco’s operating income last year, so it could be argued what’s there in the pages is fine. But as Aramco’s own marketing tells us, expanding the downstream business is a priority — why else spend $69 billion for control of Saudi Basic Industries Corp? Downstream operations are set to consume a quarter of the company’s $40 billion-plus annual capex budget.

Similarly, 40 percent of that budget is allocated to developing Aramco’s natural gas operations. Again, however, there is little disclosure about the economics of this business, apart from a summary of the resources, some price assumptions in the third-party upstream assessment and a qualitative description of the mechanism whereby Aramco gets compensated by the government for selling domestic gas at below-market rates.

Altogether, therefore, roughly two-thirds of Aramco’s capex is earmarked for developing  businesses that are likely to suppress its return on capital relative to upstream operations, at least in the near term. Even if these businesses are relatively small for now, helping investors get a more detailed understanding of what sort of profits (or losses) they have generated seems like a small ask.

I would say that, of course, but then Aramco isn’t selling stock to me. The point is that the best outcome from this IPO for both the company and its state owner would be eager participation by global money managers.

Aramco has shied away from an international listing; Rosneft’s more detailed disclosure reflects its choice of London. Persuading rich Saudi Arabians to chip in may help with the day-one headlines, but the economic effect is more akin to domestic taxation than injecting foreign capital.

Greater transparency could help with the latter; and, who knows, maybe it will be offered in the safer spaces of the road show.

A one-dollar move in assumed refining margins shifts Aramco’s valuation by less than $24 billion, or 2 percent, according to my calculations.

But a move of just half a percentage point in the discount rate (read: expected dividend yield) adds up to more than $130 billion. That seems worth giving away a little more.

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