- Saudi Aramco is planning to have an initial public offering (IPO) next month. These are the details you should know.
Over the weekend, Saudi Aramco announced that it is planning to sell a 1.5% stake in the company, which is the equivalent of 3 billion shares. And this IPO could beat the $25 billion that was raised by the 2014 IPO of Chinese e-commerce company Alibaba in New York. The Saudi Aramco IPO is important for the government to reduce its budget deficit. By listing as a public company, Saudi Aramco could be valued at up to $1.7 trillion.
The $1.7 trillion figure is actually lower than what Crown Prince Mohammed bin Salman was previously targeting. Originally, the company was seeking a $2 trillion valuation.
Large institutional investors have been skeptical about the company’s ambitious valuation though. These investors want to ensure they buy shares in the company where they could realize gains. And Saudi Aramco would be going public at a time during slower global economic growth, oil prices struggling, and a US-China trade war affecting the market.
Some of the other reasons why international investors have been concerned about Saudi Aramco is around the government having a lot of control over the company. The Saudi government decides how much oil to pump and how much to invest in new oil fields. And Saudi Aramco is required to hold spare oil production capacity in reserve to give the Saudi government more leverage but could be detrimental to shareholders.
There are also concerns about the conflict between Saudi Arabia and Iran. A couple of months ago, drones and missiles hit the largest oil installations in the world at Saudi Arabia’s Abqaiq processing facility. A number of security experts believe that Iran was behind this attack. And Saudi oil tankers have been attacked at sea and Iran is also believed to be behind that attack. In the risk factors, Saudi Aramco also pointed out that it is dependent on the reliability and security of its IT systems, which could be vulnerable to cyberattacks from foreign governments.
“There’s been very limited appetite from international investors,” added Energy Aspects founding partner Amrita Sen via Foreign Policy.
The deal is not going to be marketed in the US, Canada, or Japan. And roadshows in London and several cities in Europe were canceled. And the company decided to focus on local investors.
To prepare for this, the Saudi Arabian Monetary Authority will allow smaller retail investors to borrow twice their cash investment and double normal leverage limits the regulator allows for IPOs, according to sources with Bloomberg.
The price range for the 3 billion shares is about 30 Saudi riyals to 32 Saudi riyals — which is about $8-$8.50. And the IPO date is expected to be December 11.
Saudi Aramco is the most profitable company in the world. So investors have been clamoring for this IPO to happen. But the IPO was delayed multiple times. Originally, the company was scheduled to go public last year.
The idea for taking Aramco public goes back to the year 2016. Back then, Saudi officials were floating around a valuation of $10 trillion. And the company was thinking about selling 5% of its shares in order to raise $100 billion.
Some of Saudi Aramco’s rivals include US-based Exxon Mobil — which has a market cap of nearly $300 billion and Chevron at $229 billion.
The Saudi government has been aiming to reduce the budget deficit by diversifying outside of oil. The crown prince has been pushing for reduced dependence on oil as part of his Vision 2030 program.
Dalma Capital CEO Zachary Cefaratti told CNBC that the preliminary valuation was in line with the expectations from his company and it was planning to subscribe to the IPO in two funds it manages.
“Aramco will have a sizable weight of nearly 10% in the Saudi local market index based the current price range and stake, and Saudi Arabia’s weight in the MSCI Emerging Markets index will also increase as a result,” said Cefaratti.
At a valuation of well over $1 trillion, Aramco will surpass Apple as the world’s biggest public company. Aramco Chief Executive Officer Amin Nasser presented the final phase of the IPO for hundreds of local fund managers in Riyadh this past weekend. At the event, Nasser said that it was a “historic day” for the company.
The proceeds from the IPO will be transferred to the Public Investment Fund. The Public Investment Fund is known for making aggressive risks like putting $45 billion into the SoftBank Vision Fund.
Aramco saw a net income of $111 billion in 2018 on revenue of $315 billion.
