Cover Story: Saudi Aramco’s IPO

Saudi Ara­bia’s his­toric de­ci­sion to list part of en­ergy gi­ant Aramco is ex­pected to lead to the big­gest IPO in the world. Gulf Busi­ness looks at what this could mean for the fu­ture of the king­dom

Gulf Business - - Contents - BY EMMA HODG­SON

What could po­ten­tially be the world’s big­gest IPO is set to take place in Saudi Ara­bia. Will it mark the start of a new era in the king­dom?


Aramco is the most prof­itable com­pany in the world, dwarf­ing all its com­peti­tors. In 2018 alone, the Saudi gi­ant (with net earn­ings for the year stand­ing at $111.1bn) made more than Ap­ple, Google and ExxonMo­bil com­bined. How­ever, de­spite its prof­itabil­ity, the re­cent Aramco IPO an­nounce­ment sent rip­ples around the world, plu­ral­is­ing opin­ion. Bookrun­ning for the IPO be­gan on Novem­ber 17, and ended for re­tail in­vestors on Novem­ber 28. It is is due to end for in­sti­tu­tional in­vestors on De­cem­ber 4, with the fi­nal share price avail­able from De­cem­ber 5, just in time for the next OPEC gen­eral meet­ing. The meet­ing, set to be held the fol­low­ing day in Vi­enna, Aus­tria, will see key play­ers in the global oil in­dus­try gather to agree on oil sup­ply pol­icy for 2020.

Pre­dic­tions sug­gest that the IPO – which has been four years in the mak­ing– is likely to re­sult in the oil gi­ant be­ing listed on Saudi Ara­bia’s Tadawul stock exchange by the sec­ond week of De­cem­ber. The re­sult would be a po­ten­tial 1,500 for­eign in­vestors in the Saudi-based com­pany for the first time in more than 30 years.

Al­though the num­ber of shares ini­tially avail­able in Saudi Aramco (pre­dicted to be around 1-3 per cent) rep­re­sents a rel­a­tively small part of the com­pany, the move could still have sig­nif­i­cant im­pli­ca­tions for the wider Saudi econ­omy. Vi­jay Valecha, the chief in­vest­ment of­fi­cer at Cen­tury Financial ex­plains: “With the of­fer­ing likely to be­come the world’s largest, the list­ing will boost the over­all for­eign par­tic­i­pa­tion in the Saudi mar­kets. Ar­guably, this will be fur­ther boosted by the in­clu­sion of Saudi Ara­bia in the MSCI Emerg­ing Mar­kets in­dex. Over the long term, the IPO will most likely lead to bet­ter in­te­gra­tion of the Saudi econ­omy with the out­side world.”

Michael Tam­vakis, a pro­fes­sor of com­mod­ity eco­nomics and fi­nance at Cass Busi­ness School, agrees about the short term prospects. “The IPO opens a small win­dow for the rest of world – in­vestors and pub­lic alike – into the world’s big­gest oil com­pany. It is not so much the own­er­ship of Aramco which is im­por­tant here – as it will be such a small part of the com­pany – but the im­plied val­u­a­tion that the com­pany re­ceives from the mar­ket and how this val­u­a­tion will change as oil de­mand, sup­ply and prices change. Rather than try­ing to as­sess the im­pact of oil price volatil­ity on the pub­lic fi­nances of Saudi Ara­bia, the pub­lic will be able to see the fluc­tu­a­tion of Aramco’s stock and mar­ket cap and from there as­sess the im­pact on the do­mes­tic stock exchange and the coun­try it­self.”

Grand plans for the Saudi econ­omy

The part-pri­vati­sa­tion of Saudi Aramco has been de­scribed by some ex­perts as a lit­mus test for Crown Prince Mo­hammed Bin Sal­man Al Saud’s wider diversific­ation plans for the Saudi econ­omy un­der its am­bi­tious Vi­sion 2030 strat­egy. In­deed, many key financial an­a­lysts have pointed to the open­ing up of Aramco as a pro­ject that is likely to be used to both test the wa­ters of fur­ther pri­vati­sa­tion, as well as fund diversific­ation.

“The list­ing only en­hances Crown Prince Mo­hammed Bin Sal­man’s im­age, he is seen as a gen­uine re­former,” ex­plains Valecha.

“The bil­lions of money raised from the IPO will help achieve the king­dom’s eco­nomic agenda of build­ing non-en­ergy in­dus­tries and di­ver­si­fy­ing its rev­enue streams. It’s likely that the Aramco global list­ing – over the long term – will en­able the re­al­i­sa­tion of key projects which are part of Saudi Vi­sion 2030. For ex­am­ple, the $500bn fu­tur­is­tic Neom and Red Sea projects,” he con­tin­ues.

How­ever, Tam­vakis is less cer­tain: “The long-term im­pact is more dif­fi­cult to as­sess,” he ex­plains. “Whether the ul­ti­mate goal to di­ver­sify the Saudi econ­omy will be fa­cil­i­tated by the Aramco IPO is any­one’s guess. Hav­ing pri­vate in­vestors own a small part of the com­pany may be the way to broaden share own­er­ship for the pub­lic, which may give a sense of com­mon pur­pose to Saudi na­tion­als. It may open the way to more in­volve­ment in share own­er­ship in gen­eral and in­ter­est in sev­eral other do­mes­tic en­ter­prises, which could, in time, bal­ance the size of Aramco in the do­mes­tic econ­omy. Ul­ti­mately, how­ever, Saudi Ara­bia’s long-term prospects de­pend on how fast it can di­ver­sify away from oil, with either a pub­lic or state-owned Aramco.”

The part-pri­vati­sa­tion of Saudi Aramco has been de­scribed by some ex­perts as a lit­mus test for Crown Prince Mo­hammed Bin Sal­man Al Saud’s wider diversific­ation plans for the Saudi econ­omy

Al­though it is too soon to eval­u­ate the ul­ti­mate suc­cess of these projects – which are still more than a decade away from the coun­try’s 2030 dead­line for them, the IPO rep­re­sents “a much needed first step” says Valecha, point­ing to the fact that part-pri­vati­sa­tion will have a rip­ple ef­fect on the growth and in­vest­ment of other sec­tors such as tourism, in­fra­struc­ture and health­care.

In­deed, both Tam­vakis and Valecha agree that the move will give the average Saudi a sense of ac­ces­si­bil­ity to the king­dom’s wider wealth. “The IPO will al­low tra­di­tional Saudi-based ‘mom and pop’ in­vestors to own a piece of the pie which is the world’s largest oil com­pany,” Valecha says.

Mean­while, Meziane Las­fer, a pro­fes­sor of fi­nance at Cass Busi­ness School, ex­plains that there could be a plu­ral­ity of out­comes from the move. “The po­ten­tial ben­e­fits in­clude over­com­ing bor­row­ing con­straints and greater bar­gain­ing power with banks and fa­cil­i­tat­ing the fi­nanc­ing of growth us­ing eq­uity. Liq­uid­ity is also an im­por­tant fact, be­cause shares, un­like debt, do not con­trac­tu­ally guar­an­tee pay­ment. Port­fo­lio diversific­ation, trans­parency about price, and re­spect with the wider mar­ket, also could play into the hand of the Saudi gov­ern­ment,” he ex­plains.

Pa­trick Har­ris, head of en­ergy and nat­u­ral re­sources at Merg­er­mar­ket, how­ever, high­lights that the pre­dicted long-term move away from hy­dro­car­bons globally is cen­tral to the need for di­ver­sity at both Saudi Aramco and across the king­dom as a whole. “[The coun­try] is the cheap­est pro­ducer of hy­dro­car­bons in the world, with enough re­sources to main­tain de­mand un­til most of us are long gone. How­ever, the use of hy­dro­car­bons as a fuel will likely fade long be­fore those bar­rels are ex­tracted, and plas­tics are con­tin­u­ally los­ing global ap­peal. Saudi Aramco will need to con­tinue its on­go­ing diversific­ation,” he ex­plains.

The val­u­a­tion ques­tion

When the Aramco IPO was first an­nounced in Novem­ber this year, the com­pany was re­port­edly seek­ing a val­u­a­tion of $2 tril­lion. “Last year Aramco made prof­its of around $111bn, and it is plan­ning to pay div­i­dends of $75bn next year. At the com­pany’s de­sired $2 tril­lion val­u­a­tion, that’s a div­i­dend yield of just 3.75 per cent”, ex­plains Valecha. That num­ber would have set the com­pany at nearly half the div­i­dend yield of 6.3 per cent of­fered by other key emerg­ing mar­kets and sig­nif­i­cantly less than West­ern mar­kets, which typ­i­cally pro­vide a div­i­dend yield of 5.7 per cent.

How­ever, fol­low­ing the ini­tial an­nounce­ment, the com­pany re­vealed it would be ad­just­ing the val­u­a­tion to be­tween $1.6 tril­lion – $1.7 tril­lion. How­ever, some ex­perts be­lieve the val­u­a­tion should be low­ered to make it more com­pet­i­tive against the higher div­i­dends of­fered by other emerg­ing mar­kets. “Aramco might have to of­fer a higher div­i­dend to at­tract more for­eign in­vestors. Or to state it the other way round, a val­u­a­tion of $1.5 tril­lion seems more re­al­is­tic as it would im­ply a div­i­dend yield of 5 per cent which might be nec­es­sary to en­tice for­eign in­vestors,” ex­plains Valecha.

Ar­eas which point to a lower list­ing are fac­tors which of­ten af­fect emerg­ing mar­kets, and are high­lighted in the Aramco IPO

prospec­tus. Al­though, as Har­ris high­lights, there are key ar­eas which sets the com­pany apart from other sim­i­lar en­ti­ties. “Pub­licly listed state-owned oil com­pa­nies ha­bit­u­ally suf­fer from a real, and per­ceived, lack of cor­po­rate gov­er­nance. In many re­spects, Aramco is dif­fer­ent – it has a highly com­pe­tent and ex­pe­ri­enced man­age­ment and work­force… It is a busi­ness that has worked cheek-to-cheek with the oil ma­jors for decades, and its level of tech­ni­cal and op­er­a­tional com­pe­tence is above most emerg­ing mar­ket na­tional oil com­pa­nies.”

Al­though the fi­nal share price will not be an­nounced un­til De­cem­ber 5, it is ex­pected that at a val­u­a­tion of be­tween $1.6 tril­lion and $1.7 tril­lion, shares would be be­tween SAR30 and SAR32 per share, which could raise be­tween $24bn and $25.6bn for the Saudi gov­ern­ment. The floata­tion is the re­sult of years of work, par­tic­u­larly by the nine banks lead­ing the IPO, in­clud­ing JPMor­gan Chase, Morgan Stan­ley, Gold­man Sachs, Bank of Amer­ica and Cit­i­group.

An in­com­pa­ra­ble list­ing

The Aramco IPO will ar­guably pro­vide the most sig­nif­i­cant test yet for the rel­a­tively young Riyadh-based Tadawul stock exchange. The 12-year-old exchange will be the only place in the world where Aramco will be listed. His­tor­i­cally, high pro­file IPOs have caused stock exchange sys­tems to be over­whelmed. For ex­am­ple, Face­book’s IPO in 2012 on the US Nas­daq stock exchange was rid­dled with de­lays and pro­cess­ing is­sues, no doubt some­thing Tadawul will be looking to learn from.

Tam­vakis how­ever, ar­gues that the new IPO is in­com­pa­ra­ble, even to pre­vi­ous oil listings. “I don’t think it is easy to com­pare. Other emerg­ing mar­ket ma­jors tend to be state-owned oil com­pa­nies, where the state still re­tains con­trol, but shares are is­sued to a larger num­ber of in­vestors, in more ma­ture stock mar­kets. West­ern oil ma­jors have to be even more trans­par­ent be­cause of the dis­clo­sure re­quire­ments of the mar­ket they are listed in and the broad base of share­hold­ers who own them, in­clud­ing financial in­sti­tu­tions, in­vest­ment com­pa­nies and the gen­eral pub­lic. Saudi Aramco is a huge, global com­pany list­ing on a lo­cal exchange which is rel­a­tively small [com­pared to the New York Stock Exchange or London Stock Exchange] and where the com­pany will prob­a­bly dwarf all other ex­ist­ing listed com­pa­nies. There is noth­ing usual about Aramco’s list­ing,” he ex­plains.

Valecha adds that there is an ex­cel­lent po­ten­tial for fu­ture over­seas listings for Saudi Aramco. “Should the over­seas list­ing hap­pen, Saudi Ara­bia’s cur­rent weight of 2.6 per cent in the MSCI emerg­ing mar­ket in­dex is likely to in­crease and at­tract more in­vest­ments,” he says.

Who is in­vest­ing?

When the IPO was first an­nounced in Novem­ber, many thought that the com­pany would split its fo­cus be­tween in­ter­na­tional in­vestors and lo­cal en­ti­ties, with financial bod­ies ex­pect­ing meet­ings to

be an­nounced across the US, Asia and Europe. “Some re­ports have sug­gested that China’s state-owned en­ti­ties are plan­ning to in­vest $5bn to $10bn in Aramco’s planned IPO. The Silk Road Fund, oil pro­ducer Sinopec Group, and sov­er­eign wealth fund China In­vest­ment Corp are among the in­ter­ested par­ties. The pres­ence of an­chor in­vestors like China is def­i­nitely a big pos­i­tive as this might en­tice other for­eign in­vestors as well, which could re­sult in the is­sue be­ing over­sub­scribed,” says Valecha. Other ex­perts have in­di­cated that Rus­sia and other Asian coun­tries may play a fun­da­men­tal role in the IPO.

Al­though it will not be pub­lic knowl­edge who has in­vested in Saudi Aramco un­til early De­cem­ber, some re­cent re­ports have also pointed to a lo­cal fo­cus in in­vest­ment, with re­port­edly no planned meet­ings in the US or Europe for the IPO. More­over, it has been sug­gested by some in­dus­try bod­ies that meet­ings are likely to take place be­tween the king­dom and some of its key al­lies, such as the UAE, Bahrain, Kuwait and Oman. In­deed, Valecha points to the close financial ties be­tween Saudi Ara­bia and Asia (and in par­tic­u­lar, other Gulf na­tions) as a key in­di­ca­tor of fu­ture in­vest­ment. “The Abu Dhabi In­vest­ment Au­thor­ity, Sin­ga­pore’s GIC, Malaysia’s Petronas and some other sov­er­eign wealth funds could in­vest in the Aramco IPO. The strate­gic re­la­tion­ship which Saudi Ara­bia has with these coun­tries could be a driv­ing fac­tor for the in­vest­ments. For ex­am­ple, Saudi Aramco has a $27bn re­fin­ery joint ven­ture with Petronas, and they them­selves have $7bn in the pro­ject. UAE is an­other coun­try with which Saudi Ara­bia has friendly re­la­tions. The strong re­la­tion­ship and po­lit­i­cal clout of Saudi Ara­bia could re­sult in in­vest­ments from mul­ti­ple coun­tries,” he says.

Lo­cally, out of a pop­u­la­tion of around 30 mil­lion, up to one third are ex­pected to in­vest in the Aramco IPO, says Ellen Wald, au­thor of Saudi, Inc: The Ara­bian King­dom’s Pursuit of Profit and Power. A fig­ure helped, no doubt, by the fact that the coun­try’s gov­ern­ment is of­fer­ing sweet­en­ers for Saudi na­tion­als to in­vest in the IPO. For ev­ery 10 shares bought by a na­tional, they will get one free share if they keep them for six months fol­low­ing the ini­tial date of the list­ing. The gov­ern­ment has also re­port­edly been court­ing Saudi

Ara­bian busi­nesses and financial in­sti­tu­tions in the lead up to the IPO. Some have also pointed out that the list­ing nat­u­rally lends it­self to Saudi in­vestors, as the list­ing is in riyals (with div­i­dends also paid out in the Saudi Ara­bian cur­rency).

What next?

Fol­low­ing the flota­tion in De­cem­ber, the next cru­cial mo­ment for Saudi Aramco is likely to be sum­mer 2020. It will be the first time that in­di­vid­ual Saudi in­vestors, who have a six month in­cen­tivi­sa­tion plan, are likely to con­sider sell­ing their shares. The six-month mark will also be the next time that Saudi Aramco will be legally al­lowed to sell more shares, in­creas­ing the amount of pri­vate in­vest­ment in the com­pany, which could po­ten­tially im­pact in­di­vid­ual share prices. At this point, the com­pany could also look to other mar­kets, to trade on other in­ter­na­tional ex­changes. Looking fur­ther ahead, 2024 could present an­other key event for the com­pany, ex­plains Valecha. “For the year 2020, the com­pany has promised a div­i­dend of $75bn. This is ob­vi­ously a good thing for in­vestors who buy into the IPO, as it’s part of a prom­ise from man­age­ment to pay sta­ble div­i­dends till the year 2024, even if that means re­duc­ing the pay­out to the gov­ern­ment. Af­ter the pre­scribed pe­riod, div­i­dends will be sub­ject to oil price risk; but with Aramco, the mar­gin of safety is much higher on ac­count of its low cost of op­er­a­tions. Given the ma­ture na­ture of Aramco and the prom­ise of sta­ble div­i­dends, the stock is likely to con­tinue to ap­peal to in­come in­vestors.”

The floata­tion of Saudi Aramco is un­doubt­edly the most sig­nif­i­cant test yet for the coun­try’s stock exchange. Of course, any stock mar­ket in­vest­ment comes with risk. As Las­fer high­lights, po­ten­tial in­vestors will take into con­sid­er­a­tion the like­li­hood of a range of fac­tors from in­vestor recog­ni­tion, to obli­ga­tions and un­der­pric­ing with the new IPO.

How­ever, the floata­tion re­mains un­prece­dented in many ways, as Valecha says: “Amidst all the risks, one should not for­get the real­ity that Saudi Aramco is lit­er­ally an en­ergy gi­ant. It sim­ply can­not be wished away, and it is more than ca­pa­ble of with­stand­ing the risks it faces.”

Op­po­site page: A pri­vately-owned petrol sta­tion sup­plied by Saudi Aramco in Jed­dah, circa 1955. Be­low: Vis­i­tors watch stock move­ments in­side Tadawul

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