Aramco revs up IPO plans for as soon as 2020
Officials hope to capitalize on the positive international reaction to debut bond sale
Saudi Arabia’s state oil company is revving up plans for an initial public offering and accelerating the timeline for what would be the world’s biggest listing to as soon as early next year, according to people familiar with the discussions.
The IPO of state-owned Saudi Arabian Oil Co., known as Saudi Aramco, is being sped up as government officials hope to capitalize on the positive international reaction to the company’s debut bond sale in April, which raised $12 billion, people close to the talks said.
Saudi officials also believe pressure on the country following the murder of dissident journalist Jamal Khashoggi in the Saudi consulate in Istanbul is easing, according to people familiar with the matter.
The Saudi government needs the proceeds from the IPO to finance social and military spending, and to direct toward Neom, a futuristic city Saudi Arabia is building at a cost of $500 billion.
Higher public spending will push Saudi Arabia’s budget deficit to 7% of gross domestic product in 2019, well above the government’s forecast of 4.2%, the International Monetary Fund said in May.
The world’s largest IPO was meant to be the centerpiece of a Saudi plan to open up the economy and give investors access to the world’s most profitable company.
Crown Prince Mohammed bin Salman previously announced he would list 5% of Aramco in 2018 at a valuation of roughly $2 trillion for the entire company. Even floating 5% of the company would constitute the world’s largest IPO at around $100 billion.
The process had been delayed partly due to concerns that Aramco’s international valuation for the company wasn’t close to the royal’s estimate. Prince Mohammed more recently called for an IPO later in 2020 or 2021.
The Saudi leadership is now more confident about investor enthusiasm for a listing following Aramco’s bond sale. As part of that sale, the company disclosed key financial metrics for the first time—for instance, saying it had earned $111 billion in net income in 2018, making it the world’s most profitable company by a long shot.
The sale exceeded expectations and was seen inside the company and among bankers and investors as a successful precursor to an IPO. The company’s $69.1 billion purchase of a majority stake in Saudi Basic Industries Corp., or Sabic, announced in March, also fortified it in the eyes of investors as a firm looking to diversify beyond pumping oil.
Prince Mohammed has also said the IPO was held up to allow Aramco to acquire the Sabic stake. The transaction, which hasn’t been completed, would infuse the Saudi sovereignwealth fund with billions of dollars to carry out the prince’s agenda and possibly make new investments abroad.
As part of the reinvigorated IPO effort, Aramco weighed listing as early as this year, some of the people said, but ultimately decided it would be too rushed given the potential size and complexity of the offering.
The company is expected in the next couple of weeks to request proposals from international investment banks hoping to get a role underwriting the deal, some of the people said.
Saudi officials are again debating the valuation of the listing as well as the venue. Prince Mohammed and his advisers have telegraphed that the target valuation remains around $2 trillion, according to people familiar with the messaging. Prince Mohammed grew confident of the valuation after the bond sale, but people close to the IPO are doubtful it can be achieved.
“We are all well aware of one thing: How Aramco is sensitive to oil price,” said a senior Saudi official.
“If, let’s say, oil prices are trading at $60 a barrel, there is no way we can get the $2 trillion valuation the crown prince wants. We cannot even get to the $1.5 trillion valuation,” he said. Brent crude prices—the global oil benchmark—have fallen more than 13% since early July to around $58 per barrel.
The redoubled plans for the IPO could change again. People familiar with the company caution that low oil prices, coupled with escalating tensions with Iran, could destabilize the process.
In recent meetings to brief the crown prince about IPO preparations, Khalid al-Falih, Aramco’s chairman and Saudi energy minister, warned about the risks of listing the company amid signs of a weaker global economy and lower oil prices, according to people familiar with the matter.
Finance Minister Mohammed al-Jadaan and Economy and Planning Minister Mohammed al-Tuwaijri—both Aramco board members—argued that the listing was an important move to help the economy and to modernize the company’s governance, the people said.
While a venue for the offering hasn’t been chosen yet, Aramco officials, including Mr. Falih, are still advocating against a listing in New York. The company could invite antitrust litigation related to its membership in the Organization of the Petroleum Exporting Countries if it were to list there, due to concerns about the cartel’s efforts to control oil production and prices. Aramco identified the risk of such litigation in its bond-offering prospectus.