Saudi Aramco Drilling Down on its Highly Anticipated IPO
As Aramco, Saudi Arabia’s Oil Giant, approaches its record-breaking IPO, foreign investors seem to have lost a seat at the table. Despite hopes of listing on the NYSE two years ago, Saudi Aramco is now in the process of listing 1-2% of its shares on Tadawul, the Kingdom’s stock exchange.
The slimmed down share sale, however, may still be the largest IPO in history at $25-30 billion, ahead of Alibaba Group’s staggering $25 billion. At a valuation of $1.7 trillion, the offering price of its 3 billion shares sold would be between $8 to $8.5 per share. While the numbers seem to taunt Silicon Valley’s big names, they are short of de-facto ruler Crown Prince Mohammad Bin Salman’s $2 trillion valuation.
Bypassing the US does not mean laying down hopes for future international listings. In fact, the global outlook remains positive, as the Kingdom’s plan to monetize and diversify are still a driving force behind the IPO. Unexpected risk premiums demanded by investors following the anticipated 5% listing on the NYSE have contributed to the sudden change of plans.
While it may seem overly generous, the $2 trillion is heavily discounted as per oil industry standard P1 (proved reserves) valuation metrics. Slightly shy of 260 billion barrels of oil, Aramco’s proven energy reserves are at least 10 times the reserves of the largest investor-owned oil company, Exxon Mobil, which has around 24 billion barrels. If it were following the identical valuation metrics as its peers Exxon, Chevron, and Total, Aramco would be valued at a staggering $4 trillion.
Considering the geopolitical risk associated with Aramco as well as the hopeful economic environment regarding renewables, it would be foolish to expect investors to adhere to such a valuation. With the consultancy of McKinsey, the crown prince cut the valuation in half to $2 trillion, based on a Discounted Cash Flow analysis taking a $60 per barrel price point and a fall in demand of oil in 50 years into account.
The humbled $2 trillion valuation remains out of reach for Aramco, due to the additional challenges the company encountered as it reached out to international exchanges. The murder of Jamal Khashoggi in 2018 and the low Environmental Social and Corporate governance (ESG) sentiment towards oil companies are key factors when it comes to a shortage of foreign investor demand regarding Aramco’s IPO. Recent drone attacks at Aramco’s largest oil processing plant, Abqaiq, further justified investor concerns regarding security.
It isn’t all bad news for the oil giant. In fact, Aramco had no difficulty raising capital in 2018, with a 12-time oversubscribed bond issuance. The pricing meant that the bonds would yield less than Saudi Arabia, allowing Aramco to borrow at an absurd 100 basis points below the sovereign rate.
The new approach to monetize on the Saudi stock market remains of global importance, as the oil giant must establish itself as a public company, following International Financial Reporting Standards (IFRS).
A listing on the Tadawul Exchange will not ultimately forego foreign investment. China, India and large US institutions are not the only foreign investment channels to take part in the IPO. The addition of the Tadawul Exchange to MSCI’s Emerging Market Index, will allow individuals to hold a portion of Aramco through the NYSE, as it goes public. With a current $500 billion capacity, the Tadawul may not be suitable to hold a larger portion of Aramco, due to liquidity issues.
Saudi Aramco should not have difficulties oversubscribing the 1.5% stake it is offering, due to the large $75 billion yearly dividend and the vast amounts of money held by nationals of the Kingdom. The key is to monitor the IPO’s trading success, which would ultimately lead to an additional listing on the Tadawul exchange and higher chances of an international listing in the years to come. While an official listing in the US may still seem out of reach due to legislative concerns such as unilateral sanctions, talks of a Direct Listing, nevertheless, remain highly plausible. Allowing foreign investors to trade on Depositary Receipts (DR) will allow individuals to get their hands on the Kingdom’s prize jewel quicker than the optimistic hopes of an official listing.
Geopolitical risk, ESG and Capacity issues regarding the Tadawul Exchange are the major factors to consider when monitoring the well awaited IPO. While the sale may not compare to the seismic global financial event Crown Prince Mohammed Bin Salman envisioned in 2016, it remains extremely optimistic for the future of Saudi’s global economic accessibility. With vigorous economic diversification efforts through the kingdom’s Vision 2030, we may very well witness the largest IPO in history before the year-end.