Anyone who has an account with an online stockbroker or simply keeps an eye on the business and financial markets news will be aware that ‘The IPO’ of IPOs has been planned for 2018. An integral part of Crown Prince Mohammed bin Salman’s ambitious strategy to reform the Saudi Arabia economy into one with a sustainable long term future is the floatation of a minority stake in Aramco, the national oil company, on the stock exchange. London is reputedly lobbying furiously to be the host of the listing, somewhat controversially as it is expected that the LSE’s strict rules protecting investors may have to be adjusted or bent to accommodate Aramco.
The Aramco IPO would publicly list 5% of a company that is not only the world’s largest oil producer but also, as a sovereignly-owned company, has direct access to the world’s richest (by far) oil reserves. One fifth of the world’s proven oil reserves are held by Saudi Arabia, some 260 billion barrels of oil. Venezuela actually has a little more but it is far more difficult and expensive to extract than Saudi oil. Saudi Arabia is expected to be the dominant force in the world’s oil supply for the foreseeable future and Aramco has the monopoly on Saudi oil. Even just the 5% stake in Aramco that the planned IPO would involve would have an initial IPO value of somewhere around $100 billion, valuing the company at around $2 trillion.
It’s not difficult to see why the LSE and NYSE, the two favourites to host the listing are fighting tooth and nail for it. The size of the listing would make it the largest in the world and be a huge boost to whichever stock exchange secures it. The income it would create for consultants, advisors and the other services around it also mean that it is being referred to as ‘The IPO’ and the ‘IPO of the century’ by financial services professionals.
While there has been recent speculation that Saudi Arabia may change direction and instead sell the stake as a private placing, with China the lead investor, that was shot down over the past couple of weeks. Crown Prince Mohammed bin Salman last week insisted that while details still have to be ironed out, the IPO will go ahead at some point in 2018.
However, will there be an IPO allocation made available to retail investors? Unfortunately, while not certain, the chances are that there will not. In all likelihood the IPO will be available only to institutional investors.
Demand is almost certain to be high enough and adding a retail offering is an additional headache. Buying shares in Aramco through online stockbrokers will probably only be possible after the IPO has been completed and they float freely on the stock exchange.
The man on the street investing online would only be able to access the IPO itself via alternative means such as CFDs positions speculating on any uplift or fall in the IPO price when the shares start to trade freely.
The second question is if buying shares in Aramco via your online stockbroker post-IPO would be a good idea in the current environment of low oil prices? Saudi Arabia prefers an IPO to a private placement because it believes that will allow it to get a better price for the nation’s crown jewels. Which begs the question if the initial share price will provide value for investors?
Experts believe that investing in Aramco revolves around two bets. The first is whether Saudi Arabia can, medium to long term, manage the social and strategic issues caused to the country by cheap oil? It’s already meaning the country has had to water down the financial incentives provided to its population which could, potentially, make it more difficult for the monarchy to maintain the absolute power it has enjoyed since the nation was founded in 1932.
The second is whether capital markets eventually stop subsidising U.S. shale producers, whose output has been largely responsible for supressing oil prices over the past few years. Market participants believe that the shale industry is largely viable as competition to OPEC oil due to ‘financial doping’ that has resulted from sustained QE in the USA.
Those are both complex questions that will split opinion but online investors in the UK be keeping a keen eye on the Aramco IPO over the coming months.
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