Saudi Aramco: world’s biggest IPO under the microscope

There’s been a lot of false starts concerning the IPO of the state-owned Saudi Arabian Oil Company (Saudi Aramco) since all the way back in January 2016, when its then-chairman first mentioned his interest in a stock market IPO at an interview with Arabiya TV.

Since then, both a domestic and international IPOs have had setbacks, including valuation uncertainty, listing location discrepancy, oil price volatility and geopolitical tensions, with the most recent being the aerial attacks on two major Aramco production facilities in September this year.

While news of the attacks created yet another hurdle for the company’s IPO, the state’s efforts to modernise and diversify the Saudi economy as part of the Vision 2030 plan were unaffected. By 3 November this year, the Capital Market Authority had formally approved its intention to float on the Saudi Stock Exchange, the Tadawul.  

“Our mission is to provide our shareholders with long-term value creation through crude oil price cycles by maintaining our pre-eminence in oil and gas production, capturing additional value across the hydrocarbon value chain and profitably growing our portfolio,” Amin Nasser, president and chief executive of Saudi Aramco, said in a statement.

“Our mission is to provide our shareholders with long-term value creation through crude oil price cycles by maintaining our pre-eminence in oil and gas production, capturing additional value across the hydrocarbon value chain and profitably growing our portfolio” - president and chief executive of Saudi Aramco Amin Nasser

 

The trillion-dollar question: how much is it worth?

A week later, on 9 November, Saudi Aramco published its 658-page long IPO prospectus, which stated the final price for its shares would be announced on 5 December and that it expected the trading to commence following completion of all relevant legal requirements.

The state-owned behemoth is said to be the most profitable company in the world, making a market flotation of this size one of the largest ever. This, in turn, is a very big deal to investors and traders looking to finally get a slice of this very big pie.

Despite there being only circa 1-2% of the company’s shares set aside for international investors, how expensive a pie it will be is still a major concern. Crown Prince Mohammed bin Salman went as far as to value it at a mammoth $2trn in 2017, before this was lowered to a price implied price range of $1.6trn to $1.7trn, according to Reuters.

For research firm Bernstein, a valuation ranging between $1.2trn and $1.5trn is more likely. It told the New York Times that a premium valuation is unjustified due to it having the most oil reserves in the world and the lowest cost to access these.

“Emerging market oil majors trade at a 30% to 40% discount to developed market oil majors on most valuation metrics despite having comparable performance metrics (returns, reserves, production growth and operating margins),” analysts Neil Beveridge and Oswald Clint also wrote in a note. “We believe this discount reflects country risk and government ownership which can often lead to misalignment between minority interests and management.”

They also suggest a dividend yield of between 6% to 7% based on the fact that its earnings are expected to grow at a compound annual rate of just over 1% for the next three years, according to Barron’s.

“We believe this discount reflects country risk and government ownership which can often lead to misalignment between minority interests and management” - analysts Neil Beveridge and Oswald Clint

 

A long slippery road

In another recent development, following a meeting at Riyadh palace with some of the world’s top investment bankers on Saturday 16 November, plans to market the shares directly in the US, Europe and Asia were scrapped.

The decision was based on lukewarm reception from international investors and now, as a result, it is seeking to raise $24bn to $25.6bn from the listing, a fraction of the $100bn it had once sought. Aramco will still float 1.5% of its total shares, but at around $8 to $8.50, the New York Times reports.

Saudi Aramco was founded back in the 1930s at a time when Saudi Arabia was pursuing the exploration and development of their oil resources. In 1938, vast amounts of black gold were discovered in Saudi Arabia, paving the way for the Middle Eastern state and therefore the state-owned oil giant, to become one of the world’s most important energy resources.

The company’s output is staggering, with Saudi Aramco itself claiming it accounted for approximately one in eight barrels of crude between 2016 and 2018, according to CNBC. In the first six months of the year, Saudi Aramco produced 13.2 million barrels per day of oil equivalent, 10 million of which were crude oil.

  

Saudi Aramco was not always entirely owned by the government of Saudi Arabia – it was not until 1973 that the government first bought a 25% stake. However, the fact that it is now entirely controlled by the Saudi Arabian government is a serious concern for some investors who worry about the future of production policy, and appointment of key management personnel.

Already, profits for the first nine months of 2019 are reportedly down 18% from the same period last year. In the short-term, rising oil prices from the surge in supply from the US, Brazil, Canada and Norway could be another serious headwind for the company. But in the long run, issues with lower oil prices will ultimately be its primary concern.