Many years ago, while I was living in the Middle East, there was a limited number of television channels to watch. Aramco was one of the better ones, featuring the latest programming from US television, for Americans working in the oil industry in Saudi Arabia. Aramco was the company-owned television network of Saudi Arabia’s state-owned energy mammoth which has now announced its intention to IPO on a leading stock market.
This is likely to be the most exciting IPO of 2018 for investors – there has been plenty of speculation already about where Saudi Aramco will eventually choose to list its shares, but it also represents part of a wider revolution within Saudi Arabia to modernise and open its financial markets to international investors. The country’s government is under a new and more dynamic leadership that is focusing on moving its economy away from dependence on oil – it has been shocked by the plunge in the oil price, on the back of competition from new sources in North America.
The Saudi Aramco IPO is being hailed as potentially the biggest IPO ever at over $100 billion, topping previous record holder Alibaba by a factor of four. The real issue is whether the company is considered good value at that price. The listing represents 5% of the company, and the value is being partly driven by the value of the 265 billion barrels in Saudi oil reserves which Aramco is sitting on. At current oil prices, this is worth a lot of money.
There is a process of housekeeping underway at Saudi Aramco at the moment – ultimately, the kingdom is in the process of grooming this asset into something that could emerge as one of THE oil majors. Aramco, as the first paragraph of this article suggests, has its fingers in many pies, but the government in Riyadh wants to offer the world something that looks more like an energy company.
Under current plans for the IPO, the Saudi government will remain Aramco’s main and indeed controlling shareholder. The government has been taxing Aramco profits at 85%, but now it is proposing to trim that to 50%. Aramco has been a major cash cow for the Saudi economy, but it is unlikely that investors would tolerate such an arrangement.
Currently, the Saudis want to IPO 5% of Aramco in 2018, which would make it easily the biggest IPO of 2018 and indeed of the decade. There will also scrutiny of Saudi Arabia’s oil reserves, so that buyers of this stock will know what they are getting.
At this stage, we expect Aramco to go with a London listing, with the London Stock Exchange waiving its 25% free float rules for such a prestigious offering. New York has been campaigning hard for it too, but the Saudis will be wary of the current political climate in the United States and the litigious nature of the US system.
The Armchair Trader says:
Ignore the chatter about where Saudi Aramco will list, and which sovereign wealth funds will buy into it. The real issue is how foreign investors will be treated. There will be some big hitters interested in the stock, but this still represents a small slice of the company. This does not necessarily represent direct ownership of Saudi oil reserves either: governments in emerging markets are adept at smoke and mirror exercises that protect local interests at the expense of foreign investors, although scrutiny on Aramco and the transparency offered to investors will be huge. We remain sceptical of the $100 billion valuation, which we suspect is being talked up behind the scenes by parties interested in a slice of this deal.