The biggest stock market floatation anywhere in the world is finally set to happen with news Saudi Aramco, Saudi Arabia’s state oil company, will launch its huge IPO on Sunday November 3rd. But it won’t be taking place on any of the major Wall Street exchanges. Not even in London, Tokyo, Hong Kong or another major international stock exchange. Instead, after years of delays and false starts, Saudi Aramco’s first tranche of publically traded shares should be freely floating on the desert kingdom’s domestic Tadawul stock exchange by early December.
Saudi Aramco was 2018’s most profitable company anywhere in the world, recording a net income of $111 billion. It is targeting a market capitalisation of $2 trillion through its IPO, which would make it by far the largest ever.
Saudi Arabia’s Crown Prince Mohammed bin Salman has ambitious plans to realign the kingdom’s economy away from its almost complete dependency on oil revenues over the next couple of decades. However, with an economy that has been built entirely on the foundation of Saudi Arabia being the world’s biggest oil producer, that requires a huge shift. An entirely new economy needs to be built from the ground up and that will require a phenomenal level of investment if it is to be successful by the time oil supplies begin to dry up – though that is by no means imminent.
However, as well as the fact that Saudi Arabia’s known, commercially viable oil reserves are finite, even if the best guess is that they are deep enough to sustain several more decades of high intensity drilling and production, the global economy is also changing. We are still at the beginning of the shift but as environmental concerns mount, renewable energy sources become more efficient and technology develops away from the combustion engine, a less fossil fuel-reliant global economy is starting to appear as a speck on the horizon.
It is not clear which scenario between Saudi Arabia’s remaining oil reserves running out or a world where oil is no longer needed as a fuel will happen first. But for Saudi Arabia’s most powerful ruler, the point is that one or the other will inevitably come to pass first. Followed at some point by the other. So his forward looking plan is to invest the kingdom’s still considerable oil wealth in developing a more diversified economy. And the centrepiece of that strategy is selling off part of Saudi Arabia’s greatest asset and source of wealth – Saudi Aramco.
The company has the exclusive rights to exploit the kingdom’s known oil reserves of 257 billion barrels and employs around 76,000. In 2018 its output was 13.6 million barrels of oil equivalent a day – 10.3 million of which were crude oil. As well as drilling, Aramco has also been steadily building up its own refining capacity.
While an official announcement the IPO being launched should come on Sunday, details on the target valuation and size of the stake to be sold are expected to be limited and emerge over the following weeks after investor sentiment has been better gauged. Selling 5% of the company has been mentioned in the past but it could be less. A secondary listing on a major international exchange, which London will still hope to win though Wall Street will be confident, is expected to follow several months later. That could mean the initial domestic IPO is limited in size with reports suggesting 1% to 2% of the company’s equity will be sold, raising somewhere around $20 billion.
That would put the value of the sum raised at slightly behind the $25 billion raised by Alibaba during its 2014 New York IPO but through selling a much smaller part of the company. The overall valuation of Saudi Aramco, even if it eventually falls short of $2 trillion, would still make it the biggest ever IPO on a market capitalisation metric. Aramco commented:
“The company continues to engage with the shareholders on IPO readiness activities. The company is ready and timing will depend on market conditions and be at a time of the shareholders’ choosing.”