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If Brexit is the long goodbye, Saudi Aramco’s stock market listing is the long hello.

Mohammed bin Salman, Crown Prince of Saudi Arabia, used an interview in January, 2016, to announce the state’s plans to sell a piece of Saudi Aramco, the world’s most prolific oil producer, to private investors. The news electrified energy investors, stock exchange bosses and investment banks. MBS, as he is known, touted a market valuation of US$2-trillion – the equivalent of almost seven Exxons – and oily types everywhere were tempted to take a piece of the action. The fossil fuels era wasn’t over yet.

Then nothing.

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The world’s biggest initial public offering became the ghost IPO, although Aramco did manage to raise US$12-billion through an oversubscribed international bond sale in April. Finally, on Sunday, after a tumultuous year that included the Saudi regime’s killing of Saudi dissident Jamal Khashoggi, falling oil prices and a missile or drone attack on two Aramco sites that temporarily knocked out half of the company’s output, Saudi Arabia’s capital markets regulator said the sale was going ahead. The prospectus is due on Nov. 9 and the shares should begin trading sometime in December.

There were two big catches. The first was that the listing will be limited to the small, low-profile Tadawul bourse in Riyadh. A co-listing in London, New York, Hong Kong or elsewhere, which was part of the original plan, was dropped, at least for now. The second is that the valuation seems unlikely to reach MBS’s cherished US$2-trillion and could be well short of that figure.

Between the two – the obscure exchange and the knock-down valuation – the IPO can already can be labelled a disappointment, which is not to say it won’t sell well, depending on the price and the dividend yield. MBS wouldn’t suffer the humiliation of seeing the centrepiece his economic transformation strategy sink on the first day of trading.

The bigger question for investors big and small, domestic and international, is whether they want to be exposed to a company that will remain tightly controlled by an undemocratic, authoritarian and highly secretive state probably forever, and whether Aramco’s financial statements, particularly the health of its reserves, can be trusted. There are already ample signs that Aramco’s Ghawar reserve, the world’s mightiest on-shore oil field, is well past its prime. If it’s in rapid and terminal decline, Aramco’s value proposition would have to be entirely rewritten.

We still don’t have details of the IPO, although various published reports suggest the company will sell about 2 per cent of its shares, perhaps somewhat more, depending on the success of the book-building exercise, and that the valuation would be as low as US$1.5-trillion, US$500-billion less than MBS’s old target. Other estimates put the valuation a few hundred billion higher.

The dividend yield will be crucial in attracting investors. According to Refinitiv, the average dividend yield of the supermajors (Exxon, Royal Dutch Shell, Chevron, BP and Total) next year will land at 5.6 per cent. Aramco’s yield would have to be close to that figure. The company has already said it will pay a US$75-billion annual dividend to investors. That payout, assuming a US$1.5-trillion valuation, would generate a yield of about 5 per cent. A US$2-trillion valuation would drop the yield to about 3.8 per cent. The lower valuation wins.

Aramco has been busy sweetening the offer, all the better to boost the valuation. The royalties and tax rates to be collected by the government have come down. On Sunday, Aramco disclosed that it would pay a tax rate next year of only 10 per cent on its refining and chemicals business, down from 50 per cent or more. A few billion extra dollars might be tacked onto the dividend payout, and capital expenditures are to be trimmed. Aramco wants investors to know that the company will be a formidable cash-flow juggernaut.

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But for how long? A crucial question centres on the strength of Aramco’s reserves. If they are not as robust as advertised, the company’s ability to pump 10-million-plus barrels a day, equivalent to about 10 per cent of global consumption, would come into question.

Aramco listed its reserves in 2017 at 260-billion barrels, second only to Venezuela. In spite of monumental production over the decades, the reserve figure, oddly, has not been trimmed. Assuming the figure is accurate, Aramco has a long and highly profitable life ahead of it (last year, its net income was US$111-billion).

The potential trouble spot – and it’s a biggie – is Ghawar. The oil world had assumed that the field was producing five-million barrels a day, or half of Aramco’s output. The figure was based on the last official public document on the field’s capabilities, revealed in a slide presentation by Aramco executives in 2004 in Washington.

The shocker came earlier this year, when Aramco published its bond prospectus, which revealed that Ghawar’s production is now only 3.8-million barrels a day. There was no information on how fast it is depleting. We also learned that 80 per cent of Aramco’s reservoirs are less than 40 per cent depleted, but that 20 per cent of them are half gone already. Whether Ghawar was in the former or latter category wasn’t said.

The IPO prospectus may shed more light on Aramco’s reserve profile. Then again, it may not. The financial disclosure requirements on the Tadawul exchange are not as stringent as those in London or New York, which may help explain MBS’s decision to shun international listing. Aramco’s IPO will succeed, at a price, because it has to. Until more light is shed on the stamina of its reserves, Aramco’s long-term prospects will remain an open question.

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