Saudi Aramco IPO 'huge' but smaller than expected

Saudi Arabia’s state oil company Aramco is seeking to set a record for the world’s largest-ever initial public offering (IPO) in plans announced Sunday that nonetheless scale back preparations in terms of size and international trading.

Oil tanks bearing the Saudi Aramco logo at the oil facility in Abqaiq, Saudi Arabia, in October 2019. The Gulf kingdom is looking to set a world IPO record by selling of 1.5 percent of the company. Reuters/Maxim Shemetov

Saudi Aramco, officially the Saudi Arabian Oil Company, announced it would sell a 1.5 percent stake in the company in a bid to raise capital and diversify the Gulf kingdom’s economy by opening up to foreign investment.

In doing so, it hopes to raise as much as 25.6 billion US dollars (23 billion euros), passing the $25 billion float of Chinese retail giant Alibaba in 2014.

Still, the plans scale back on previous targets for the company’s long-anticipated debut on the public market.

Projections are based on plans to sell at 30 - 32 riyal per share, which would value the company between 1.6 and 1.7 trillion US dollars, down from the previous 2-trillion-dollar target of Crown Prince Mohammed bin Salman.

Domestic investment encouraged

It also scales down earlier plans to sell up to 5 percent of the firm and largely limit investment to the domestic and regional markets. Around 0.5 percent of the company shares have been reserved for Saudi investors.

“It’s still huge, but it’s not what we would have expected two or three years ago,” says Cyril Widdershoven, a consultant on the energy industry in the Middle East.

“The main issue is not the size, but the fact that the IPO is going to be mainly inside Saudi.”

Saudi nationalists have pressured wealthy business families to invest, calling it a patriotic duty, and senior cleric Abdullah al-Mutlaq said on television last week that the IPO was permissible in Islam and that even religious scholars were likely to participate.

Aramco is also courting investors in China and Russia.

Geopolitical tensions

The downscaled offer is explained by several points of apprehension when it comes to seeking international investment, especially in Western markets.

“There is a fear inside Saudi that if the IPO would be on the New York or London stock exchanges, there would have been transparency and legal issues,” Widdershoven says.

“Also, it is coming at a time that oil prices are under pressure, and global oil demand is perceived as cooling down.”

Saudi Arabia’s international stature was also harmed by the death of journalist Jamal Khashoggi in October 2018. And the September 2019 drone attack on an Aramco facility that brought almost 5 percent of the world’s oil supply to a halt also raised questions about stability.

“There is some fear in the market that if you are able to bring down the largest oil company in the world with 10 or 15 drones, the risk of an outside party interfering in your shareholding will be extreme,” Widdershoven says, adding that unrest in Iraq and tensions with Iran also play a role in shaking confidence in the region's business prospects. 

“Saudi Aramco’s oil is in Saudi, so anything that happens inside of Saudi or around Saudi has a much larger impact on your shareholding,” says Widdershoven.

(with newswires)