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Saudi Aramco kick-starts what could be world's biggest IPO, offers scant details

CommoditiesNov 03, 2019 06:02PM ET
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By Rania El Gamal, Marwa Rashad, Saeed Azhar and Davide Barbuscia

DHAHRAN, Saudi Arabia/DUBAI (Reuters) - Saudi Arabia's giant state oil company finally kick-started its initial public offering (IPO) on Sunday, announcing its intention to float on the domestic bourse in what could be the world's biggest listing as the kingdom seeks to diversify its economy away from oil.

But in its long-awaited announcement, Aramco, the world's most profitable company, offered few specifics on the number of shares to be sold, pricing or the date for a launch.

Bankers have told the Saudi government that investors will likely value the company at around $1.5 trillion, below the $2 trillion valuation touted by Crown Prince Mohammed bin Salman when he first floated the idea of an IPO nearly four years ago.

Aramco also did not mention what measures it has taken to beef up security following unprecedented attacks on its oil plants in September.

Sources have told Reuters the oil company could offer 1%-2% of its shares on the local bourse, raising as much as $20 billion to $40 billion. A deal over $25 billion would top the record-breaking one of Chinese e-commerce giant Alibaba (N:BABA) in 2014.

"Today is the right opportunity for new investors to reap the benefits of Aramco's ability to achieve value, and boost it on the long-term," Aramco Chairman Yasir al-Rumayyan told a news conference at the company's headquarters in the eastern city of Dhahran.

The company will spend the next 10 days talking to investors and sounding out their interest and the price range will follow, he said.

The IPO is designed to turbocharge Prince Mohammed's ambitious economic reform agenda by raising billions to build non-energy industries and diversify revenue streams.

Rumayyan said a decision on an international listing for Aramco shares will be made in the future, without giving a time frame or possible venue.

"Selling a small piece of Aramco in a captive market gives the KSA (Kingdom of Saudi Arabia) more control to prop the value of Aramco up over its fair value," said Gary Ross, CEO at Black Gold Investors.

Confirmation of the sale of shares in the oil giant, whose formal name is Saudi Arabian Oil Co, comes about seven weeks after the 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 Sept. 14 attacks, which targeted plants at the heart of Saudi Arabia's oil industry and initially halved its production, would have a material impact on its business, operations and financial condition.

Aramco accounted for about one in every eight barrels of crude oil produced globally from 2016 to 2018, it said on Sunday.

Its net income for the third quarter of 2019 amounted to $21.1 billion, according to Reuters calculations, dwarfing the income for the same period of oil giants such as Exxon Mobil Corp (N:XOM), which was just over $3 billion. 

Chief Executive Amin Nasser said at the news conference that Aramco plans to release the prospectus on Nov. 9.

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

"Whatever this local round achieves, with domestic players being strong armed into investing, international investors are still going to value this well below the expectations of (Crown Prince) Mohammed bin Salman," said Rory Fyfe, managing director at Mena Advisors.

LURING INVESTORS

The Saudi stock market fell 2% on Sunday after the announcement. The benchmark index (TASI) is down nearly a fifth since May as local institutions sold shares to prepare for the Aramco deal, fund managers and analysts say.

Salah Shamma, head of investment, MENA, at Franklin Templeton Emerging Markets Equity, said some local investors could be selling other shares in order to shift investments to Aramco, but this could well be a case of "short-term pain for long-term gain."

To comfort investors, Aramco said on Sunday the state will forgo its right to receive a portion of cash dividends on shares, giving priority to new shareholders.

Aramco is also cutting royalties it pays to the state. Effective Jan. 1, 2020, it will adopt a progressive royalty scheme, with a marginal rate set at 15% up to $70 per barrel, 45% between $70 and $100, and 80% if the price rises higher.

The firm said the Saudi market regulator, which approved the application to list on Sunday, 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.

At a valuation of $1.5 trillion, Aramco would still be worth at least 50% more than the world's most valuable listed companies, Microsoft Corp (O:MSFT) and Apple Inc (O:AAPL), which each have a market capitalisation of about $1 trillion.

But a 1% sale would raise "only" around $15 billion for Saudi coffers, ranking Aramco as the 11th biggest IPO of all time, Refinitiv data show. (For a graphic on the top 10 largest global IPOs, see https://tmsnrt.rs/33gWypM)

"Some perspective on the Aramco IPO for the overall Saudi diversification story is needed: the likely Aramco IPO proceeds will be less than the Aramco dividends the government received in the first half of 2019 alone," said Hasnain Malik, head of equity strategy at Tellimer.

(GRAPHIC: Aramco vs. Oil Majors 9-month earnings: https://fingfx.thomsonreuters.com/gfx/ce/7/7184/7166/Pasted%20Image.jpg)

THE 'RIGHT TIME'

The promised listing has had Wall Street on tenterhooks since Prince Mohammed flagged it in 2016.

Aramco mandated 27 banks to work on the deal including Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), HSBC, JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS).

"I think this is the right time for us to take Aramco to be a public company ... we wanna go IPO and we wanna go now," Rumayyan told reporters on Sunday when asked about the timing.

Initial hopes for a blockbuster international listing of about 5% were dashed when the share sale was halted last year amid debate over where to list Aramco overseas.

Aramco said the IPO timetable was delayed because it began a process to acquire a 70% stake in petrochemicals maker Saudi Basic Industries Corp (SE:2010).

Prince Mohammed also came under intense international criticism last year for the killing of Washington Post columnist Jamal Khashoggi in Istanbul by Saudi operatives, a murder for which the crown prince has said he bears responsibility "because it happened under my watch."

The death tarnished the image of the kingdom's de facto ruler and imperiled his plans to diversify the economy. Republican and Democratic lawmakers, also citing the civilian toll from a Saudi air campaign in Yemen, have ramped up efforts to block U.S. arms sales to Saudi Arabia.

IPO preparations were revived this summer after Aramco attracted huge interest in its first international bond sale, seen as a pre-IPO relationship-building exercise with investors.

But a listing announcement expected on Oct. 20 was delayed after advisers said they needed more time to lock in cornerstone investors, three sources told Reuters.

A growing movement to fight climate change and embrace new "green" technologies have put some fund managers, particularly in Europe and the United States, off the oil and gas sector.

The bond sale in April forced the secretive company to reveal its finances for the first time, including net income of $111 billion -- more than a third bigger than the combined net income of the five super oil majors. Those companies have been raising payouts to shareholders to counter rising pressure from climate activism.

Aramco said on Sunday it intended to declare aggregate ordinary cash dividends of at least $75 billion in 2020.

At a valuation of $1.5 trillion, this would mean a dividend yield of 5%, below that offered by rival Royal Dutch Shell (L:RDSa). Shell's dividend yield is over 6%, according to Refinitiv data.

(GRAPHIC - Aramco valuation vs oil majors: https://fingfx.thomsonreuters.com/gfx/ce/7/7185/7167/Pasted%20Image.jpg)

Saudi Aramco kick-starts what could be world's biggest IPO, offers scant details
 

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Comments (8)
Hank Williams
Hank Williams Nov 03, 2019 10:37PM ET
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Dear SEC, Please explain how WS is allowed to support pricing controls in oil by supporting a history of production controls.
Hank Williams
Hank Williams Nov 03, 2019 9:46PM ET
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This is a last ditch effort to create links with WS. The long trend in oil is down. The more time that goes by the lower the value of this IPO. You provide the middle class with EV s tomorrow and this IPO doesn't happen.
Andrew carson
Andrew carson Nov 03, 2019 6:38PM ET
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Reserves at a quarter tank? From what 1940 ish till now, 2019 with no new mammoth oil discoveries mentioned?
Steven Chen
Gamer_LG Nov 03, 2019 4:22PM ET
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if it is publicly owned, then how will it impact its sole fiduciary duty on maximizing profit and its role in opec which is illegal in most countries. price fixing by throttling supply is a fraud if this thing is going to be traded in nyse
Ziyaad Kader
Ziyaad Kader Nov 03, 2019 11:08AM ET
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what time is market open
Max Rochester
Max Rochester Nov 03, 2019 11:08AM ET
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Joshua Hunt
Joshua Hunt Nov 03, 2019 11:08AM ET
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9:30
Reem Alhumaidan
Reem Alhumaidan Nov 03, 2019 10:14AM ET
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Is it going to affect bitcoin price?
Dean Armato Jr
Dean Armato Jr Nov 03, 2019 10:14AM ET
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Aiki Maniac
Aikimaniac Nov 03, 2019 1:57AM ET
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Value not as desired, declining demand, lower revenues...i think this IPO is right now such a nice hook to get some big fish on board... KSA knows that the times oil is going to be not such a good business are coming.. they just want money for something they know its going down...
Herman van Drie
Herman van Drie Nov 03, 2019 1:57AM ET
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Had exactly same thought, what not better than to go to exchange and get ton of money before recession hits hard. During recession only more focus on green energy and voila, this will only spiral down
ugur timsah
ugur timsah Nov 03, 2019 1:57AM ET
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exactely. crude price for brent will be btw usd 20-30/bb in 10 years and like Yamani had said once no one will want it
Andrew carson
Andrew carson Nov 03, 2019 1:57AM ET
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The big green joke.
Arjun Kothari
Arjun Kothari Nov 03, 2019 1:33AM ET
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will the oil price be increased or decreased for this IPO?
Chris Michaels
Chris Michaels Nov 03, 2019 1:33AM ET
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I believe weve already seen the move in crude for this event. My bigger question is what if any investments leave the current majors
Max German
MaxiGE Nov 03, 2019 1:33AM ET
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nothing nownthey only limit upside
Max Rochester
Max Rochester Nov 03, 2019 1:33AM ET
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its alright steady going up...what does this mean?  . . . o comfort investors, Aramco said on Sunday the state will forgo its right to receive a portion of cash dividends on shares, giving priority to new shareholders.. . Aramco is also cutting royalties it pays to the state. Effective Jan. 1, 2020, it will adopt a progressive royalty scheme, with a marginal rate set at 15% up to $70 per barrel, 45% between $70 and $100, and 80% if the price rises higher.
Andrew carson
Andrew carson Nov 03, 2019 1:33AM ET
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My take, Aramco needs reserves hence the IPO when bears are everywhere. Negative price actin on the soon to be stock could hurt those efforts, thus possibly causing spikes in oil prices.
 
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