Nov 18, 2019

Saudi Aramco's shrinking IPO

Ben Geman, author of Generate

President and CEO of Saudi Aramco Amin Nasser (left), and Aramco's chairman Yasir al-Rumayyan (right).

Saudi Arabia's decision to abandon a $2 trillion valuation for the Aramco IPO underscores hurdles facing Crown Prince Mohammed bin Salman's plans to use the company as a tool for diversifying the kingdom’s crude-reliant economy.

Driving the news: ICYMI, over the weekend Aramco announced preliminary pricing on the offering that signals an estimated valuation of the world's largest oil-producing company in the $1.6–$1.7 trillion range.

  • They also announced that just 1.5% of the company — or 3 billion shares — would be offered, and it's not clear when or if there will be a subsequent sale that would approach the 5% initially envisioned.

What's new: There are other signs of hurdles facing the effort. One is that it's increasingly clear that it's essentially a regional affair.

  • "Saudi Arabia has called off plans to formally market shares of its state oil company outside the kingdom and other Gulf countries ahead of its long-awaited initial public offering," the Financial Times reports Monday.

By the numbers: The initial pricing estimate announced Sunday of 30–32 Saudi riyals, or roughly $8–$8.50 per share, on the kingdom's domestic exchange would bring an IPO in the $24–$25.6 billion range.

  • It might be the world's largest, depending on where it falls, but it's far from MBS' initial goals. The final offer price will be announced on Dec. 5.

AB Bernstein analysts, in a note, said the proposed $1.6–$1.7 trillion valuation is "above our estimates and above what many institutional investors we have spoken with would deem to be reasonable."

But, but, but: However, they also note that cornerstone investors, sovereign wealth funds and local investors could still enable them to achieve the target, given the "strategic interests" of those parties.

The intrigue: Bernstein also points out that the valuation implies a lower dividend yield than other oil majors. Bloomberg analysts Chris Hughes and Liam Denning similarly note the valuation would put the yield behind Shell, BP, Total and others.

  • "True, those companies don’t have Aramco’s supercharged profitability. On the other hand, they don’t have to fund a country with their earnings," they write.

The big picture: Despite the pared-back ambitions, an S&P Global Platts analysis published Monday points out that finally launching the IPO will still bring a big cash infusion.

  • "The pressure is now on for Crown Prince Mohammed bin Salman to deliver on his vaunted Vision 2030 roadmap and transform the change-resistant kingdom into a dynamic, diverse economy that can persevere once the world has moved beyond oil," they report.

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