By Arab News
By Cornelia Meyer*
Eager investors waited for three years for this moment: The prospectus for the Saudi Aramco initial public offering (IPO) came out on Nov. 10. The transaction is billed to become the largest IPO in history.
In 2016 Crown Prince Mohammed bin Salman announced that he wanted to list Saudi Aramco on the stock exchange. Aramco is the Kingdom’s national oil company and its crown jewel. It is the world’s largest oil producer and the world’s most profitable company measured in net income. It is also an extraordinarily well-run organization.
The road to the release of the prospectus was long. There was the question of where the shares should be listed, the issue of the valuation and timing. A plethora of financial advisors including Goldman Sachs, JP Morgan, Citigroup and HSBC worked on the IPO.
Earlier this year Aramco also bought 70 percent of the petrochemicals giant SABIC from the Public Investment Fund, (PIF), Saudi Arabia’s Sovereign Wealth Fund. Aramco also changed its chairman from the country’s previous energy minister to PIF’s governor, Yasir Al-Rumayyan. This move made sense, because investors might have seen a conflict of interest if the energy minister, who is also the regulator, headed the company’s board. Al-Rumayyan is a former investment banker and as such is able to create the vital link between the shareholder (the government) and the banks advising on what investors were looking for.
There was also the drone and missile attack on Abqaiq and Khurais in mid-September, which knocked off 50 percent of the company’s production in one go. Aramco managed to restore production by the end of September — ahead of schedule. Capacity will be restored in full by the end of this month.
Now the prospectus is out. Some data points are missing. We know that 0.5 percent of shares will go to retail investors. Information about the number of shares allocated to institutions is yet to be released. Overall the company is expected to list between 2-3 percent of the shares. Valuation is another point requiring clarification. The bankers’ price tag ranges between 1.2 – 2.3 trillion dollars. This is a huge valuation by comparison: Exxon’s market cap is $300 billion and chevron’s $229 billion.
The valuation will be announced after Nov. 4, when the book building process for institutional investors will be finalized. Valuation will be key, because investors will want to understand the dividend yield. Aramco has announced that it will pay a cash dividend of $75 billion. Exxon’s dividend yield stands just below 5 percent and BP’s at 6.3 percent.
The initial IPO will only take place on Saudi Arabia’s Tadawul exchange. This again makes sense, because Saudi individuals need to be given an opportunity to own a part of the country’s crown jewel — however small that part may be. The company will be precluded from issuing more shares for six months.
It may make sense to have an international listing down the road — be it in New York, London, Hong Kong or Tokyo. The former two make particular sense, because they are deep and liquid, which is an advantage given the sheer size of the company (New York may have some legal drawbacks pertaining to impending NOPEC legislation and potential 9/11 litigation).
The prospectus was very open in discussing risks. It used IHS analysis stating that peak demand for oil could be reached within the next 20 years, reflected on tightened emissions regimes due to climate change concerns going forward, and mentioned geopolitical risks. The latter became obvious in September, when it also became evident that the company was able to deal those risks in terms of restoring production swiftly and supplying customers without interruption. Some investors may still be wary, because the Kingdom is located in a geographical area defined by conflict. On the plus side, the country’s geology allows Aramco to be a very low-cost producer.
Like in any transaction, investors will have to weigh risks against returns. Saudi Aramco is the wold’s most profitable company. It is also operationally competent. Climate change and energy transition affect the positioning of the sector as a whole. Declining oil prices have been an issue in the industry in general. On top of that, OPEC member countries have been affected by productions cuts, which impacted on volume while supporting the price. Aramco is a low-cost producer and can withstand price shocks better than most. Every investment yield risks, but few have such a solid foundation in terms of operational capability and profitability. There is investor interest, if the initial bond offering in April of this year is anything to go by. It was hugely oversubscribed.
• Cornelia Meyer is a business consultant, macro-economist and energy expert.