Why a domestic listing for Saudi Aramco is suddenly back on the agenda

Time and time again, pundits have explained why a Saudi-only listing cannot succeed, using seemingly well-founded arguments

Saudi Arabia has not yet decided on the international venue for the dual-listing of oil major Saudi Aramco, with London, New York, Singapore and Hong Kong all vying for the prestigious IPO.

Such a delay in announcing a venue raises the intriguing possibility of a Saudi-only listing.

There is speculation that the highly anticipated IPO – which may be the largest the world has ever seen – will be delayed until next year, and that the international component will be a secondary listing, with a primary offering on the Saudi stock exchange, Tadawul, becoming a more realistic choice.

Such a prospect will no doubt cause many investment bankers and financial advisers to worry about losing out on bonuses and advisory fees if a local primary listing proceeds.

But is there any justification for this scenario? And more importantly, is listing Aramco exclusively on Tadawul a viable option?

Time and time again, pundits have explained why a Saudi-only listing of Aramco cannot succeed, using seemingly well-founded arguments. They point to Tadawul’s small size – it may be the largest stock market in the Arab world, but with a market capitalisation of just $487 billion, it pales in comparison with major international bourses like New York and London.

Observers list other factors, such as the volatility such a listing would generate on Tadawul – with mostly individual investors selling their current shareholdings and buying into the new Aramco IPO offering – and suggest there would be little inward capital flows. They also point out that there is still some way to go for Tadawul to ensure that the necessary legal, regulatory and operational infrastructure is in place to handle such a large listing, and that an IPO on a prominent international bourse would bring the kingdom prestige, and ensure that Aramco applies best-in-class governance models.

Over the past few weeks, however, comments from Aramco chairman and Saudi Energy Minister Khaled Al Falih suggested a subtle but significant change of tone on the IPO, leading to speculation on whether an international-exchange listing in a market such as London or New York now hangs in the balance.

The minister raised questions about a New York listing over litigation concerns stemming from the Justice Against Sponsors of Terrorism Act and existing lawsuits against rival oil companies for their role in climate change. “The only thing we know today is that Tadawul will be the key listing location as our national exchange,” Mr Falih told CNN earlier this month.

With well-connected oil companies such as BP, Chevron, ConocoPhilips, Exxon Mobil and Royal Dutch Shell not immune from such lawsuits, Aramco cannot expect any favouritism or exemption.

Mr Falih also, however, provided a significant reason for why a local listing now made more sense than before.

“We are waiting for the reforms to be in place and to join MSCI, and an Aramco listing in Tadawul will be catalytic for that capital market as we bring international capital to the kingdom,” he said in the same interview.

As to timing and whether there was an internal deadline for the IPO, the minister was again frank by stating that as far as Aramco was concerned, it was not going to be bound by an “artificial listing deadline” and would go to market only when it was ready to do so.

The Saudi exchange has been working hard to introduce reforms in its legal, regulatory and operational infrastructure. It is also opening up to allow more foreign investors to participate in the market by buying into Saudi stocks as qualified foreign investors without having to go through Saudi intermediaries as before. Under new regulations introduced in January, non-resident foreign investors can own up to 10 per cent of an issuer’s listed shares, while this rises to 49 per cent for both resident and non-resident foreigners.

But the hoped-for inclusion of Saudi stocks in a number of prestigious international indexes is the main factor for the newfound optimism for a Saudi-only listing of Aramco.

The Saudi bourse is now very confident it will be added to FT Russell’s Emerging Markets list this month; inclusion in MSCI’s Emerging Market Index, from next year onwards, is widely expected to be announced in June.

Such inclusions would ensure a local Tadawul listing of Aramco would attract significant passive capital inflows, as the Saudi Tadawul would be allocated a certain percentage weighting in these indexes and investors would, in effect, be “buying into” the Tadawul index and the Aramco listing.

MSCI has proposed giving its existing Saudi Arabia stock index emerging market status rather than stand-alone status, following a series of market reforms by the kingdom such as the previously mentioned higher caps on foreign ownership of companies, as well as reduced settlement cycles and the introduction of short-selling.

Saudi Arabia would have a market capitalisation of $124bn in MSCI’s Emerging Markets Index, according to an updated proposal published by the index provider last month, giving it an index weight of 2.3 per cent. Assuming that another $100bn would be added through an Aramco initial public offering – the desired level set by the kingdom – Saudi Arabia’s weighting would rise to about 4 per cent, which would be bigger than Russia’s weighting of 3.4 per cent.

Passive investment funds that track MSCI indexes would need to put 4 per cent of their funds allocated to emerging market indexes into Saudi shares to match the country’s weighting.

According to MSCI, $1.7 trillion of assets were benchmarked against MSCI emerging market indexes at the end of June last year, of which about a fifth was from passive investors. That could mean around $14bn could come into Saudi stocks from passive investors; if active investors also increased their Saudi exposure to the weighting following an Aramco IPO, the total inflows could be as much as $70bn.

Doing a Saudi-only initial listing for Aramco does not preclude an international listing at a later stage, as this would provide more time for the company to carry out its internal structural and governance reforms and produce the necessary audited accounts on a regular basis.

This would ensure that any future incremental IPO listings to the initial 5 per cent is well received by international investors.

Such is the appetite for a slice of the planned Aramco listing that already Chinese, Russian and other Asian investors are willing to come in as anchor private placement investors; this also leaves open the possibility that a listing in Hong Kong (potentially less problematic compared with New York or London) could still be done along with a sizeable Saudi listing.

In the end, a final decision on when and where to list Aramco will be made by Crown Prince Mohammed bin Salman, who oversees the kingdom’s economic and oil policies and who has to juggle the multi-faceted implications of such a listing that involves geopolitical relations, a hard-headed risk analysis and maximising financial rewards.