Saudi Arabia’s oil mammoth is up for public listing – Is it attractive enough for investors?

• What makes Saudi Aramco’s IPO biggest in the world?
• How is Aramco’s IPO viewed by global investors?

The world is about to witness the biggest IPO in the history of capital markets when Saudi’s oil giant – Saudi Aramco goes public in early December this year. Saudi Arabia’s Crown Prince Mohammed bin Salman (MbS) valued Saudi Aramco at $2 trillion in 2016, when he first announced his plan to list the company. However, in its recent release, the company offered a price range of SAR 30 to SAR 32 per share, seeking a valuation of $1.6-1.7 trillion, discounting Crown Prince’s target by 15-20%. At $1.7 trillion, it will still be the highest valued public company with market capitalization way higher than that of Apple. Even at lower end of the price range, SAR 30 per share, it will be three times bigger than the entire Saudi stock market. At higher end of the price range, though, the IPO would be the biggest in history, defeating Alibaba (2014) and Softbank (2018). However, most analysts and institutional investors find this value too ambitious and quote their value in the range of $1.2 - $1.5 trillion.

Saudi Aramco is the world’s largest integrated oil and gas company, controlling about 10% of the world’s oil production through its huge oil fields. It is the most profitable company in the world with the lowest production cost of $2.8 per barrel. Saudi Aramco’s profit (2018) is equal to the combined profit of Apple, Google and Exxon Mobil and is way above the combined income of major oil & gas exploration, refining and marketing companies like BP PLC, Chevron Corp, Exxon Mobil Corp, Royal Dutch Shell PLC and Total SA. The company earned net income of $111 billion in 2018 and $68 billion in first 9 months of 2019. Given the size and profitability of the company, it is considered as the crown jewel of the country’s business, influencing its politics and economy significantly. On an average, it produces 10 million barrels of crude oil per day at lowest possible cost.

In 2016, Crown Prince Mohammad bin Salman expressed his interest to make Saudi Aramco a public company and list it on both domestic as well as international stock exchanges. The purpose was to generate revenue for the kingdom to fund the project called “Vision 2030” with the intention to diversify the economy, to reduce and eventually end Saudi’s dependence on oil exports. IPO proceeds will form a part of the country’s sovereign wealth fund, which will be used to build new cities and projects, thereby, opening fresh avenues for growth.

However, within 3 weeks of announcement, the IPO plan got shelved, apparently because the King was not in favour of disclosing company figures to public which would become a requirement once the company is listed. Also, the $2 trillion value placed by Prince Mohammed faced resistance from international investors.

Three years later, in 2019, officials again brought up the idea of Aramco flotation, which has also been approved by the Saudi Arabia’s Capital Market Authority. Following this, the company released its prospectus on 17^th November 2019, however, reduced the valuation to $1.6 – 1.7 trillion. Nonetheless, international investors continue to be cautious of its revised valuation given low oil prices and global concern over climate crisis forcing (gradual) shift to renewable sources. Being the most profitable company in the world, it initially excited the investors, however, given that even after public listing (of only 1.5% stake), the state will continue to hold the rest of the pie, poses a huge risk, particularly for international investors. Apart from concerns over governance issues and state interference in company strategy, investors are also apprehensive about geopolitical scenario after the recent drone and missile attacks (allegedly by Iran) on Saudi facilities, shutting down ~5.7 million barrels per day of production. The company, however, was quick in returning to business as usual as it restored output in record time.

Analysts also echo these concerns. “The biggest issue with Aramco is that everything about this company is controlled by the Saudi royal family — shareholder opinions, your board votes, none of that makes any difference. The government will do whatever it wants, whether it’s raising production, curtailing production, investing in one geography versus another. They simply will not care what their private shareholders will wish to see.” stated Pavel Molchanov, director and energy analyst at Raymond James.

Dissatisfied with low interest from foreign investors, Saudi Aramco officials finally decided to stick to domestic market and sell 0.5% stake to retail investors in its early December listing on Tadawul stock exchange. In the local market, officials are relying significantly on wealthy Saudis who are reportedly withdrawing existing investments in stock markets and properties to prepare themselves for the Aramco listing day. Saudi Arabia is leaving no stone unturned to make local listing a success. It has cut the tax rate for Aramco thrice so far, has promised the world’s largest dividend of $75 billion next year and offered bonus shares for retail investors who hold of the stock. It has also relaxed lending limits to boost local demand.

Attracting local investors seems less of a challenge, however, to make the IPO a credible one, it must also attract foreign investors, which for now seems difficult as it is listing only on local stock exchange. History also shows public listing of state-run companies have always been considered a risky affair. Russia’s state-run giants, Gazprom and Rosneft, generally trade at a discount compared to other publicly owned integrated oil and gas players like BP, Chevron. Compared to these companies, Gazprom offers higher dividend yield of 7% versus 3.9% by Chevron, to cover for the risk that profits can shift to government’s pockets easily. Dividend of $75 billion proposed by Aramco, could be highest in value terms, however, offers the yield in the range of 4.4% to 4.7%.

Despite all concerns, Aramco’s IPO which is open for bidding has been oversubscribed already, though only by a small margin. Bids from retail and institutional investors are oversubscribed by 1.5 and 1.7 times respectively. Majority of institutional investors are Saudi companies and funds, while foreign investors account for only 10.5% of the offering. Bids for the IPO would close on 4^th Dec.

In nutshell, the largest oil company in the world is going public in December 2019, which will be the biggest IPO in the world. The offer price is yet to be finalized and is expected to be in the range of SAR 30 to 32 per share. After scrapping its plan to list the company in international markets, Saudi government is expecting its local listing to be a huge success attracting domestic as well as international investors. Foreign investors, however, remain hesitant to invest given the governance issues, slow shift away from oil due to climate concerns and government interference in company matters even after listing and ambitious valuation. Nonetheless, despite being viewed cautiously for above reasons, post listing Saudi Aramco will be the most profitable publicly listed company in the world.