The Fuse

Aramco IPO Concerns Linger As Value Hits $2 Trillion

by Gregory Brew | December 13, 2019

It’s been a long, strange trip for the IPO of Saudi Aramco.

The rollout of Saudi Aramco this week appeared successful—billions were raised and the company’s valuation shot above $2 trillion, an estimation once considered a pipe-dream.

It’s unclear if the IPO’s current momentum will sustain itself

But even with such success, it’s unclear if the IPO’s current momentum will sustain itself, or even if it will contribute meaningfully to Saudi Arabia’s long-sought economic reform. The event, expected for over a year, was in many ways watered-down, and failed to meet the once-lofty expectations of its engineer, Crown Prince Mohammed Bin Salman.

On Wednesday, December 11 shares began trading on the Tadawul, the Saudi exchange. With only 1.5 percent of the company offered, trading pushed the price past expectations, rising from 32 Saudi riyals to 35 Saudi riyals ($9.38).

The share price gives Saudi Aramco a valuation of $1.88 trillion, launching it past Microsoft and Apple as the world’s most valuable company.

The following day, shares surged past 38.7 riyals ($10.32) before dropping to 37, putting Aramco’s value past $2 trillion.

It’s the biggest IPO in history, with Aramco raising $25.6 billion, surpassing the $25 billion raised by Alibaba in September 2014.

Two years ago, shortly after Crown Prince Mohammed bin Salman (MBS) first announced plans for an Aramco IPO, enthusiastic projections of a $2 trillion valuation dominated headlines. Initial plans announced in 2017 had the IPO listing 5 percent of Aramco’s total value—a $100 billion offering.

It was a fairly simple formula. Saudi Arabia’s proven reserves in 2017 were 261 billion barrels. Multiplied at $8/barrel, Aramco could be valued at $2.088 trillion.

The news of the IPO shook the oil world, and Wall Street banks crowed over the fees attached to such mammoth undertaking.

Was Saudi Aramco really worth as much as the Crown Prince claimed?

But analysts were skeptical: in the face of uncertain demand, persistent low prices, and changing government regulations driven by fears of climate change, was Saudi Aramco really worth as much as the Crown Prince claimed?

Estimates of Aramco’s value varied wildly. Wood Mackenzie conducted its own survey, and came up with the discouraging sum of $400 billion. Commentators at Bloomberg put the company’s value between $500 billion and $1 trillion, based on performance measured against other large energy firms, including Rosneft and ExxonMobil.

Given the unprecedented nature of the IPO, fixing on a single figure proved nearly impossible. Estimates from one economist contributing to Forbes ran from $100 billion to $2.2 trillion.

More recently, as the IPO date approached, numbers started to shore up. But it didn’t look too good for Riyadh.

The Saudi government, hedging its bets in the aftermath of the Abqaiq attack in September, set Aramco’s value at $1.7 trillion. Bloomberg and Bank of America set the figure much lower, at $1.22 trillion.

Riyadh did its best to make the state-owned company an attractive investment. Taxes on Aramco operations were cut in 2017. Saudi efforts in OPEC have concentrated on cutting production in order to boost prices, in order to bolster the IPO, originally scheduled for 2018.

Interest in launching the IPO on an American exchange declined once it became clear that stringent requirements would endanger the IPO’s success.

But investors weren’t taking the bait. Interest in launching the IPO on an American exchange declined once it became clear that stringent requirements would endanger the IPO’s success. Earlier this year, MBS took Aramco on the road, in an effort to elicit investor interest. The reception was tepid.

Once it became clear that international investors valued Aramco at between $1.1 and $1.7 trillion, Saudi plans changed. The roll-out was scaled back, from 5 percent to 1.5 percent. instead of launching on an international exchange, Saudi Aramco would be launched on the Saudi exchange, Tadawul.

Instead of institutional investors, hedge funds, or other big buyers, the Saudi government has pushed the IPO at home. Saudi nationals have been strongly encouraged to buy into the company, with national media pushing support for the IPO as a form of patriotism.

The push seemed to work. Interest in the IPO inside Saudi Aramco spiked, with nationals buying shares at the bank or through ATMs. Interest-free loans were offered as a way to buy more stock.

Foreign involvement in the IPO has thus far been quite minimal. Wall Street banks brought on to supervise the IPO were paid $64 million, a fairly small fee compared to the $300 million paid out by Alibaba after its 2014 IPO.

Apart from local investors, regional interests have also reportedly bought into the Saudi IPO. The United Arab Emirates and Kuwait, both Saudi allies, contributed to the offering, though exact figures are not known. One source reported that 10.5 percent of offers came from foreign investors.

But analysts on Wall Street and elsewhere are waiting to see what happens next. Interest in the IPO outside of Saudi Arabia was low, and the initial surge of investment seems to have been “manufactured,” according to one source.

One of the initial justifications for launching the IPO was the idea of transparency and integration—that by tying Saudi Arabia’s biggest company to the international market, it would help open up the Saudi economy to further international investment. That’s unlikely to happen if the bulk of Aramco shares are held by Saudi nationals.

Still, Saudi citizens who buy shares will own a piece of a hugely profitable enterprise. Saudi Aramco earned $111 billion in 2018, after producing 13.6 million bpd. Saudi Aramco’s reserves are larger than its five biggest rivals—ExxonMobil, Chevron, Shell, Total, and BP—combined.

But without international exposure, Saudi Aramco will continue to be an institution closely tied to the Saudi government—making MBS its effective CEO.

Can Saudi Aramco maintain its current momentum? As any investor will tell you, it’s still far too soon to tell. But the biggest problems facing the IPO—its true valuation, and the transparency of its operations—will likely continue to dog Riyadh, as it tries to cement the status of Saudi Aramco’s as the world’s most valuable company.