Saudi Aramco’s Only IPO Foray Provides a Cautionary Tale

by Javier Blas

The refinery two hours by car north of Mecca is easily overlooked in the Saudi Aramco colossus. But it offers a bonus: a window into one of the world’s most secretive businesses.

Since the Saudi state-owned oil giant sold shares in Rabigh Refining and Petrochemical Co. in 2008, the facility has provided a peek into a small corner of its operations. With few other clues available as Saudi Arabia prepares a massive initial public offering of as much as 5 percent of Aramco for next year, investors are scrutinizing the refinery for insights into the parent company itself.

The picture at PetroRabigh isn’t promising: a falling share price, mounting losses and troubled operations. Perhaps more importantly, the plant’s struggles pierce a key narrative that Aramco has built about itself: best-in-class installations, engineering prowess and superior employees. Yet for all the challenges at PetroRabigh, investors are likely to take them in stride.

“Investors will buy into Aramco for its oil production not for its refining,” said Danilo Onorino, a portfolio manager at Dogma Capital SA in Lugano, Switzerland. “But they will still look at PetroRabigh to benchmark the valuation of its downstream assets and look for clues about how Aramco works.”

The PetroRabigh IPO remains the only time Aramco, the world’s biggest oil exporter, has tested the equity markets. The 132-page long IPO prospectus — and thousands of extra pages in subsequent regulatory updates, annual reports and financial statements — offer the most detailed insight into a business unit run by Aramco and even some tidbits about the parent itself.

For example, the 2008 prospectus revealed the amount of power Aramco consumed at the time: 2,000 megawatts, equal to two nuclear reactors. But it also issued clear warnings to investors, including that PetroRabigh had “significant long-term borrowings” and that its “strategy contemplates significant capital expenditures for the development of future expansions.”

The listing was meant to be a test case of how its parent, formally known as Saudi Arabian Oil Co., could use the markets to finance projects and transfer a piece of the country’s oil wealth to ordinary Saudis. But from the beginning, PetroRabigh ran into trouble: the petrochemical complex suffered a fire, lost power multiple times and accumulated debts.

It wasn’t part of a wider industry malaise — while PetroRabigh struggled, most competitors advanced. From its listing in 2008 to last week, investors in PetroRabigh lost nearly 30 percent, including dividends, in U.S. dollar terms, according to data compiled by Bloomberg. In the same period, Valero Energy Co., the largest U.S. refiner, returned 66 percent, and the S&P 500’s four-member refinery index added 56 percent.

Officials at Aramco declined to comment for this story.

Aramco and its partner Sumitomo Chemical, sold shares in the 400,000 barrel-a-day PetroRabigh refinery in January 2008 at 21 riyals ($5.60). The sale valued the complex at just under $5 billion, or about half of what it cost to build. Aramco will likely be valued at its IPO at more than $1 trillion, according to analysts at Sanford C. Bernstein & Co. and Rystad Energy AS.

At first, the PetroRabigh IPO proved popular among local investors and it more than doubled in its first day of trading. But by the end of 2008, the stock had dropped 79 percent from its peak. PetroRabigh has accumulated losses of $428 million since its listing in 2008, according to data compiled by Bloomberg. In 2016, it made a profit of $9.7 million.

On Jan. 21 last year, when Saudi Arabia’s deputy crown prince shocked the global energy industry with his plan to sell shares in Aramco, PetroRabigh shares tumbled to an all-time low of 7 riyals. Since then, PetroRabigh shares have recovered to trade at 12.3 riyals, yet, the cash bleed continues. PetroRabigh reported a loss of $64 million in the first quarter.

Aramco owns stakes in two other listed refining companies — though the firm bought into them after they were already public. One is S-Oil Corp., a South Korean refiner capable of processing 669,000 barrels a day, in which Aramco has a 63.4 percent stake. The other is Showa Shell Sekiyu K.K., a Japanese group with a 445,000-barrel capacity, in which Aramco has a 15 percent holding. Both have performed better than PetroRabigh, delivering total returns in U.S. dollar terms of nearly 79 percent and 43 percent respectively from January 2008 to last week.

To be sure, there are huge differences between the PetroRabigh IPO and the forthcoming sale of its parent. Aramco produces more than 10 percent of the world’s oil, while PetroRabigh is able to refine 0.4 percent of the global total and is just one of the company’s nine domestic refineries. The parent is almost debt free, according to people familiar with the company, while PetroRabigh has debts of $11 billion, compared with an equity valuation below $3 billion, according to data compiled by Bloomberg.

The business itself is vastly different. “PetroRabigh is a downstream business, it’s about refining and chemicals, not about oil production, which is the core business of Saudi Aramco,” said Mazen Al-Sudairi, head of research at Al Rajhi Capital Co. in Riyadh.

Bottom of Form

While PetroRabigh itself can’t be used to value Aramco as a whole, it does help to appraise its downstream, or refining, business. Aramco controls 3.1 million barrels a day of global refining capacity, with 2 million inside the kingdom and the rest in the U.S., South Korea, Japan and China. Using PetroRabigh, S-Oil and Showa Shell Sekiyu as a combined benchmark to calculate the valuation of Aramco’s downstream business yields about $33 billion.

Within Aramco today, the IPO of PetroRabigh is seen as a sore chapter, according to people familiar with the company’s thinking, who asked not to be identified because they aren’t authorized to speak publicly. However, Aramco officials say it isn’t representative of the listing of the parent, the same people said.

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