Kingdom Comedown

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What's going on?

In the same week that the influential Saudi Arabian Crown Prince meets US President Trump, the Kingdom is reportedly dialing down plans to turn its state-owned oil firm into the world’s most valuable publicly traded company…

What does this mean?

It was way back in 2016 that the heir to the Saudi throne first floated the idea of selling a stake in state-owned oil company Aramco to international investors via an IPO. The aim was to raise up to $100 billion in a deal that would value Aramco at $2 trillion. But now, following protracted flirtations with potential host countries for the listing and delays to the IPO timeline, The Wall Street Journal reports that the new plan is simply to sell a much smaller stake in the oil giant on a stock exchange in Saudi Arabia. That will severely curb international investors’ enthusiasm – as well as the amount of money that the IPO will raise for Saudi Arabia.

Why should I care?

For markets: Investors appeared unwilling to pony up.

Saudi Arabia reportedly underestimated how complicated an international IPO would be, and claims that it doesn’t need the money as badly now that the oil price has more than doubled since 2016. But the real deal-breaker may be that investors balked at giving Aramco a lofty $2 trillion valuation…

The bigger picture: The skepticism over the deal could relate to investors’ cautiousness over fossil fuels.

Aramco largely based the $2 trillion figure on the massive size of its oil reserves (in other words, the amount of oil it could drill in the future). But a whole desert filled with oil isn’t going to be much use if we’re driving around in electric cars and flying in solar-powered aircraft come 2050. In other words, investors aren’t so sure they want to own a long, long-term investment tied to the price of oil.

Originally posted as part of the Finimize daily email.

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