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Saudi Aramco IPO focuses on domestic investors amid challenging market conditions

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By Beatrice Bedeschi – The Initial Public Offering (IPO) of Saudi Arabia’s state oil company Saudi Aramco has seen a refocus on domestic investors after what was expected to be the largest IPO on history saw a reduction in valuation amid challenging market conditions.

On 17 November, Saudi Aramco said it was looking to sell 1.5 per cent of the company’s stock, or about three billion shares, on the country’s Tadawul exchange at an indicative price of 30-32 riyals, putting it at a maximum valuation of USD1.7 trillion, and below the value of USD2 trillion previously set by Riyadh, according to media reports.

Aramco is the world’s most profitable company, with profits of USD111 billion last year and with a planned dividend of USD75 billion next year, more than five times larger than the payout by Apple, the biggest of any S&P 500 company, Reuters reported.

Initial expectations were to raise as much as USD100 billion from the sale, which would have exceeded the USD25 billion raised by China’s Alibaba in 2014.

However, despite initially planning to sell shares internationally as well as domestically, the company recently called off formal investors meetings in Europe, US and Asia, thus restricting the target to the kingdom’s investors and those in Gulf countries. 

Plans are to sell 0.5 per cent share to retail investors, with the remaining 1 per cent largely to be taken by Saudi institutions and funds in the region, while foreign institutional interest will be limited to a pool of 1,500 investors already able to trade on the Saudi stock exchange, the Financial Times reported.

International investors interest muted 

International investors pushed back at what was seen as an excessive price for the company’s shares, amid concerns over leadership and security of energy facilities, commentators said.

As Robin Mills, CEO at Middle-East focused energy consultancy Qamar Energy, told Hedgeweek, international investors are: “concerned mainly about the valuation itself rather than about the company, as they were looking at a something closer to USD1.2 trillion,” and other Saudi factors, such as concerns over violations of human rights and attacks on oil facilities, are also playing a role in a somewhat cooler than expected reaction from international investors.

In addition he says: “The oil sector itself is also difficult for investors, there’s a lack of satisfaction with oil.”

Mihir Kapadia, CEO of Sun Global Investments, told Hedgeweek that the valuation listing of Saudi Aramco at USD1.7 trillion, “has taken many by surprise, especially since the country’s crown prince, Mohammed bin Salman, had sought USD2 trillion.

“However, after the country decided to make the IPO an exclusively Saudi affair, restricting sales from the likes of USA, Japan and Canada, it should come as of no real surprise that the numbers are lower than previously expected.”

As the IPO will rely mostly on domestic investment, both large and small scale, hopes to raise USD100 billion for the kingdom have been “slashed in what will be seen as a big blow to the crown prince”.

At the same time, Mills says: “the difference between raising USD25 billion instead of the USD100 billion [previously targeted] is not that significant in the wider context. It would cover about one year of budget deficit and the kingdom is still faced with the issue of funding budget through raising debt and sovereign debt holdings.”

Aramco had been mulling an IPO since 2016. With the sale finally moving forward Kapadia says: “There is a mixed sentiment as to whether this was the right time, especially with the country missing all three of its IPO goals before it has even began trading,” adding that Aramco’s profits have dropped slightly this year amid tensions in the region and weak oil demand. 

Saudi Aramco was hit by a drone strike in September, suffering a substantial curtailment in production at the world’s largest oil processing facility, although it later said production had been restored. 

On the upside however, Kapadia says “by downscaling to a smaller investment target, many within the region may not be phased by the issues or pricing, unlike international investors, and we should expect the company to sell the IPO once it has officially floated,” adding that the move is also crucial for Saudi Arabia’s Vision 2030 plan.

Vision 2030

Aside from valuation concerns, “the more important issue for Saudi Arabia is the ultimate impact of the IPO,” says Colin Foreman, deputy editor at GlobalData.

The IPO “is a cornerstone play in Riyadh’s Vision 2030 economic reform programme, launched in April 2016, which seeks to diversify Saudi Arabia’s oil-dominated economy and increase the role of the private sector by driving growth and job creation,” he adds.

“Economic diversification is the key part of the long-term plan for eliminating the budget deficits or at least making them sustainable,” says Mills.

The plan is for the proceeds of the IPO to go to the Public Investment Fund (PIF), which is the government’s shareholder in Aramco. 

“PIF has been tasked with delivering a wide range of projects in the kingdom across multiple sectors. After two to three years of planning, these projects are moving into the construction phase, which requires a major rise in investment,” Foreman says. “If the proceeds of the Aramco IPO are invested as planned, and become a catalyst for broader development, then the long-term value of the listing will greatly outweigh any potential disappointment in the company’s valuation.” 

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