Nov 18, 2019

Saudi Aramco's shrinking IPO

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.

Go deeper:

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Oil giant Saudi Aramco sets initial IPO valuation at $1.7 trillion

The Saudi Aramco oil refinery in Saudi Arabia. Photo: Tom Stoddart/Hulton Archive/Getty Images

Saudi Arabian state-owned oil giant Saudi Aramco said in an updated prospectus Sunday that it has set an initial valuation of $1.6 trillion to $1.71 trillion.

Why it matters: The IPO could potentially be the world’s biggest, though it does fall short of Saudi Crown Prince Mohammed bin Salman's hopes of a $2 trillion valuation.

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Saudi Aramco's IPO is huge and limited at the same time

Illustration: Eniola Odetunde/Axios

There's a split-screen effect with the Saudi Aramco IPO: it's simultaneously the largest ever and an event that's less consequential than initially envisioned.

Driving the news: The company yesterday said shares would be priced at 32 riyals, or $8.53, per share on the country's domestic exchange, representing a $1.7 trillion valuation.

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Saudi Aramco is taking the world's largest oil producer public in what is expected to be the largest IPO of all-time — but it will be smaller than expected. Dan digs in with Axios' Ben Geman on what this means for global financial and energy markets, plus the future of Saudi Arabia.

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