Saudi Aramco makes history with shares trading

Aramco reaching the $2 trillion valuation threshold is vindication for the Saudi government.
Sunday 15/12/2019
Officials from the state-owned Saudi oil company Aramco and the stock market celebrate during the debut of Aramco on the Riyadh stock exchange, December 11. (SPA)
Making history. Officials from the state-owned Saudi oil company Aramco and the stock market celebrate during the debut of Aramco on the Riyadh stock exchange, December 11. (SPA)

Nearly 40 years after the Saudi government attained 100% ownership of the Arabian American Oil Company (Aramco) from US oil company partners and 31 years after the Saudi Arabian Oil Company (Saudi Aramco) was formally established, history was made December 11 when Saudi Aramco shares began trading on the domestic stock exchange.

Saudi Aramco shares performed robustly, the first two days of trading on the Tadawul, temporarily raising the oil firm’s market valuation past the $2 trillion threshold that Saudi government officials had insisted was the correct value for the listing.

In what would have been considered inconceivable five years ago, Saudi Aramco sold 1.5% of the state oil and natural gas giant — 3 billion shares — in a record-setting initial public offering (IPO) and began floating shares on the Gulf country’s bourse.

On its debut day of trading, Aramco saw its shares open 10% above its IPO share price of 32 riyals ($8.53) to hit 35.2 riyals ($9.39), reaching the session percentage cap on price moves. In the second day of trading, Aramco shares continued to make strong gains, rising to 38.7 riyals ($10.32) before settling at 36.8 riyals ($9.81) by the end of the session.

The IPO delivered several firsts for the state energy firm. Aramco’s limited sale raised $25.6 billion December 5 to take the title of the world’s largest IPO, beating the $25 billion record set by Chinese e-commerce firm Alibaba in 2014.

The Saudi company announced that it may exercise all or part of a 15% “greenshoe” purchase option during the first 30 days of trading, selling more shares should demand dictate — potentially totalling 3.45 billion shares. This could increase the IPO’s sales proceeds to $29.4 billion.

With an initial valuation of $1.7 trillion and trading on the Tadawul, Aramco is the world’s most valuable publicly listed company. The first-day performance on the Saudi stock exchange pushed Aramco’s valuation up to around $1.88 trillion and the second day’s trading temporarily lifted that valuation to more than $2 trillion.

Reaching that threshold is vindication for the Saudi government, which had long argued for a $2 trillion valuation against substantially lower estimates from within financial and oil industry circles.

The Saudi government settled on a $1.7 trillion figure for the IPO, though still convinced the higher valuation was justified. Speaking about the valuation on December 6, Saudi Oil Minister Prince Abdulaziz bin Salman Al Saud said: “It will be higher than the $2 trillion. I can bet this will happen.”

The Saudi government began buying participation interest in the original oil entity Aramco from American oil company consortium partners in 1973, starting with a 25% stake, increasing to 60% the following year and, in 1980, acquiring 100% participation interest in the oil company. In 1988, Saudi Aramco was formally established.

Riyadh set the ball rolling on the partial privatisation of Aramco in early 2016 when then-Deputy Crown Prince Mohammed bin Salman bin Abdulaziz broached the idea of selling up to 5% of the company on both the domestic exchange and one or more foreign bourses.

Saudi Crown Prince Mohammed declared that at a valuation of $2 trillion, the Aramco IPO would garner up to $100 billion in sales proceeds. That revenue was to be directed into the Saudi sovereign wealth fund, the Public Investment Fund (PIF), to spur investment as part of the kingdom’s economic transformation programme known as Saudi Vision 2030.

After numerous setbacks, the scaled-back IPO focused primarily on a domestic and Gulf investor base with the sole listing on the Tadawul. Aramco stipulated that the 1.5% offering would be divided into two tranches — 0.5% of shares dedicated to retail (individual) investors and 1% of shares allotted to institutional investors.

The Saudi government pressed wealthy Saudi families to make large purchases and called on Gulf allies, through their sovereign wealth funds, to invest heavily in the limited sale. The Saudi government encouraged its citizens through a robust public relations campaign to take part in the historic opportunity to own a piece of the oil firm.

The IPO proved immensely popular within the kingdom, with retail and institutional investors together bidding for 4.56 times the number of shares offered in the IPO. More than 5 million retail investors applied for the company shares. Saudi Aramco IPO manager Samba Capital reported that 97% of the retail investors who received shares were from the country, while Saudi companies, funds and government institutions comprised 75% of the institutional shares sold.

Even should the Aramco IPO ultimately garner close to $30 billion in sales proceeds, it is a fraction of the $100 billion that the Saudi government had envisioned to reshape the kingdom’s economy and shift it away from being oil-centric through strategic in-kingdom and foreign investments.

In an interview with Bloomberg News, Saudi Finance Minister Mohammed al-Jadaan said the PIF would be emphasising domestic opportunities from the IPO earnings, saying “a lot of their allocation will go into the local economy, sectors that are promising, sectors that are large, requiring a large investment that the private sector cannot really invest on their own.”