PIF the Magic Aramco IPO
Prince Mohammed’s rejection of a production freeze, and his revelation of Saudi’s plans to IPO Saudi Aramco and put it in PIF, the Kingdom’s sovereign wealth fund, is driving an oil correction that was inevitable anyway. The freeze has always been irrelevant, with non-Iran OPEC production at record highs, but flat now for months. The IPO, which would include reserves, will drive rigorous disclosure of the size and nature of those reserves for the first time in 35 years – it’s a wild card in terms of market perception, but it’s in Saudi’s interest to manage the disclosure to maximize value. The IPO turns an illiquid and opaquely valued asset into a liquid and transparently valued one, giving Saudi a powerful war chest to survive the oil price-war and regional rivalries in the wake of the destabilizing “Obama doctrine.” This highlights what we think are undervalued call options on geopolitical risk embedded in the oil price, especially now that physical supply and demand are finding balance. The bottom is in.