Record-setting Aramco IPO announced
The Saudi government has formally kick-started the process for its long-anticipated initial public offering of state oil and natural gas giant Saudi Aramco, a sale that could prove record-breaking.
However, Riyadh’s announcement was short on specifics, leaving potential investors guessing about key details.
Saudi Aramco revealed its intention on November 3 to proceed with an initial public offering (IPO) on Saudi domestic stock exchange, the Tadawul, with company executives saying shares would be floated in December in two tranches — one for institutional investors and another for retail investors.
“Today marks a significant milestone in the history of the company and important progress towards delivering Saudi Vision 2030, the kingdom’s blueprint for sustained economic diversification and growth,” Saudi Aramco Chairman Yasir al-Rumayyan said in a statement.
The IPO will be launched in a tough economic and geopolitical environment for Riyadh. Crude prices remain some $20 a barrel lower than what the government wants and the latest Saudi Aramco earnings indicate a decline from a year ago.
The security of the company’s oil-producing and processing operations is a concern following drone and missile attacks in September believed to have been perpetrated by Iran that targeted critical infrastructure and halved the firm’s crude output.
Questions about the volume of shares the company will offer, the timing of the flotation on the Tadawul and the all-important valuation of the state energy firm are unknown as Saudi Aramco executives embark on a book-building process to drum up investor interest and determine an issue price.
The company is expected to offer 1-2% of its shares on the domestic bourse. Though the company skirted specifics about timing, Saudi-owned news channel Al Arabiya reported that subscription for investors would start December 4, with Saudi Aramco shares beginning to trade on the Tadawul December 11.
One stumbling block in moving forward with the IPO — the Saudi government’s intransigence on accepting less than a $2 trillion valuation — seemingly has been removed with Riyadh conceding to more realistic estimates by industry analysts and bankers of valuation of $1.5 trillion-$1.8 trillion.
The announcement of Saudi Aramco’s intention to proceed with its IPO came after approval of the limited sale by Saudi state regulatory agency Capital Market Authority (CMA) on the same day. Saudi Crown Prince Mohammed bin Salman bin Abdulaziz had signed off on the announcement two days prior.
“The price at which all subscribers in the offering will purchase shares, the number of shares to be sold and the percentage of the shares to be sold will be determined at the end of the book-building process,” Saudi Aramco said. “The offering is being made available to qualifying individual investors and institutional investors.”
The CMA will allow non-resident institutional foreign investors to purchase IPO shares as qualified foreign investors under certain conditions.
It’s been nearly four years since Crown Prince Mohammed broached the idea of selling a stake in the Saudi state crown jewel, with plans to list up to 5% of Saudi Aramco on the Tadawul and on one or more foreign stock exchanges. The Saudi government contended it would reap as much as $100 billion in proceeds from the sale based on its determination of a $2 trillion valuation of the state oil giant.
The profits are to be directed into the kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), which is the investment vehicle for Saudi Vision 2030, Crown Prince Mohammed’s programme to overhaul the kingdom’s economy.
The IPO process has faced considerable delays, affected by stubbornly low oil prices, the regime’s insistence on the high valuation and indecisiveness on selecting a foreign exchange for listing. Rumayyan suggested that floating shares outside of the kingdom is not a priority, saying: “If we consider an international listing, it will be in the future.”
The Saudi government recently delayed the official announcement of the IPO so that Saudi Aramco could disclose its latest earnings to highlight the company’s profitability but the company reported that its 9-month earnings slipped 18% from the same period in 2018, with Saudi Aramco earning net income of $68.2 billion in the first three quarters of 2019 compared to $83.1 billion in the same period last year. Saudi Aramco’s annual net income of $111 billion last year made it the world’s most profitable firm.
Despite unfavourable domestic and global economic environments, the Saudi government needs the IPO to happen because Vision 2030 has not produced tangible results towards revamping the kingdom’s economy. With no foreign listing slated and an expected lower valuation, the $100 billion proceeds figure, heavily promoted by the Saudi government over the past four years, is difficult to attain.
An IPO that offered 1% of Saudi Aramco shares at a valuation of $1.5 trillion would generate around $15 billion for the PIF. A 2% share flotation at that same valuation would pull in around $30 billion, eclipsing Chinese e-commerce firm Alibaba’s $25 billion IPO in 2014. That would make the Saudi Aramco sale the largest IPO ever, a public relations factor certainly part of Riyadh’s calculations.