Ready, get set – Saudi Arabia approves Aramco IPO

Saudi Arabia‘s state oil company kick-started its initial public offering (IPO) on Sunday, announcing its intention to list on the domestic stock exchange as the kingdom seeks to diversify and create the world’s most valuable listed company.

Aramco did not give a timeframe or say how much of the company it would sell, but sources have told Reuters news agency the oil company could offer 1 percent to 2 percent of its shares on the local bourse, raising as much as $20bn-$40bn.

Aramco said the IPO would be split into two tranches: one each for institutional and individual investors. The percentage of shares to be sold and the purchase price would be determined after the book-building period, it added in a statement.

Confirmation of the share sale in Saudi Arabian Oil Co, or Aramco, as the oil giant is usually known, comes some seven weeks after crippling attacks on its oil facilities, underlining Saudi Arabia’s determination to push on with the listing regardless.

Aramco said it does not expect the September 14 attack on its oil plants will have a material impact on its business, operations and financial condition. The attacks targeted the Abqaiq and Khurais plants at the heart of Saudi Arabia’s oil industry, causing fires and damage and temporarily shutting down 5.7 million barrels per day (bpd) of production – more than 5 percent of global oil supply.

The company did not specify any additional security measures.

The IPO of the world’s most profitable company is designed to turbocharge Crown Prince Mohammed bin Salman‘s (MBS) Vision 2030 economic reform agenda by raising billions of dollars to diversify the kingdom’s economy away from fossil fuels.

“It is a colossal public offering that could potentially generate more than 10 years worth of proceeds raised through IPOs in the country,” said Salah Shamma, head of investment, MENA, Franklin Templeton Emerging Markets Equity.

He said some local investors could be selling other shares in order to shift their investments to Aramco, but this could well be a case of “short-term pain for long-term gain”.

‘Compromise’ on target

Aramco’s valuation has been the subject of fierce speculation since MBS first floated the idea of a share listing back in 2016. 

Aramco plans to release the IPO prospectus on November 9 Chief Executive Amin Nasser told a news conference in Dhahran, Saudi Arabia.

Saudi Aramco chairman Yasir al-Rumayyan told the news conference that the valuation for the company should be determined after the roadshow.

MBS has long desired a $2 trillion valuation for the state oil giant. But sources told Bloomberg News on Friday that Saudi Arabia was willing to compromise on that target to ensure the IPO is a success.

Many analysts and bankers believe $1.5 trillion is a more realistic valuation for Aramco.

Investor sensitivity to geopolitical risk was heightened after the September 14 attacks on Aramco’s facilities that temporarily gutted the kingdom’s oil production and laid bare the vulnerability of its oil infrastructure.

A growing movement to fight climate change and embrace more sustainable energy technologies has also put some fund managers, particularly in Europe and the United States, off the oil and gas sector.

At a $1.5 trillion valuation, Aramco would still be worth at least 50 percent more than the world’s most valuable companies, Microsoft and Apple, which each have a market capitalisation of about $1 trillion.

But a 1 percent sale would raise “only” around $15bn for Saudi coffers, less than the $25bn generated by Chinese e-commerce giant Alibaba in its record-breaking IPO in 2014.

It would rank Aramco as the 11th biggest IPO of all time, Refinitiv data show.  

A sale of 2 percent of Aramco shares at a $1.5 trillion valuation would make it the biggest IPO of all time, beating Alibaba’s.

Domestic considerations

Another factor for investors to consider is reputational risk surrounding the kingdom and its defacto ruler, MBS. An opaque anti-corruption drive that began in November 2017 was seen as a shakedown of wealthy Saudis. The gruesome murder of journalist Jamal Khashoggi was linked directly to MBS, though Riyadh denies the crown prince’s involvement. 

“It would be smarter for the crown prince to try to get some political stability before engaging in this kind of major step that is going to put the Saudi economy on the line,” said Ibrahim Fraihat, an associate professor at the Doha Institute for Graduate Studies.

Fraihat said the IPO was “significant for many reasons” but described its timing as “definitely the worst”.

“Aramco is about sovereignty for Saudi Arabia – and here is the kingdom putting it up for privatisation,” he told Al Jazeera.  

Aramco said in Sunday’s statement that it posted a net income of $68bn during the nine months ending on September 30. Revenues and other income related to sales for the same period amounted to $244bn, it added.

To help get the deal done, Saudi Arabia is relying on easy credit for non-institutional retail investors and hefty contributions from rich locals.

Aramco said the Saudi market regulator, which approved its application to list on Sunday, had issued an exemption for non-resident institutional foreign investors to subscribe.

Saudi investors would be eligible to receive bonus shares – a maximum of 100 bonus shares for every 10 allotted shares.

Saudi nationals would be eligible to receive bonus shares.

It said the government will forgo its right to receive a portion of cash dividends on Aramco’s shares, giving priority on such distribution to new shareholders.

In a further bid to make itself more attractive to investors, Aramco is also cutting the royalties it pays to the Saudi government.

Aramco said that, effective January 1 2020, it will adopt a progressive royalty scheme, with a marginal rate set at 15 percent up to $70 per barrel, 45 percent between $70 and $100, and 80 percent if the price rises higher.

The listing announcement had been expected on October 20 but was delayed after advisers said they needed more time to lock in cornerstone investors, three sources told Reuters news agency.