Saudi Aramco, Saudi Arabia’s huge national oil corporation, has reportedly been forced into revising the valuation it hoped to achieve through its impending IPO down to $1.7 trillion from $2 trillion. The more modest target valuation is said to be the result of muted investor demand for the IPO planned for December 12th. That’s despite the fact members of Saudi Arabia’s extended royal family and wealthy local businessmen are being strong armed into investing in the IPO, which will see a 1.5% stake in Aramco listed on Riyadh’s Tadawul stock exchange.
Saudi Arabia’s Crown Prince Mohammed bin Salman hopes to raise between $24 billion and $25.6 billion through the sale, with the cash earmarked for transforming the desert kingdom’s economy into one less dependent on oil. Since the plan to float Aramco as a public company was first mooted a few years ago, the level of proposed valuations that have drifted out of Saudi Arabia have met with scepticism from international investors.
No one is doubting that Saudi Aramco, which claimed net income of $111 billion last year, is a hugely valuable company. It’s the world’s largest oil producer and has the exclusive rights to Saudi Arabia’s reserves. The company is behind one barrel of oil in every eight produced globally. However, there are doubts around the huge valuations the Crown Prince has put forward.
He originally hoped selling a 5% stake in the company, through a combination of a local listing and another on a major international exchange, could bring in as much as $100 billion. But a $2 trillion valuation has proven too rich for investors who need to be convinced of the business merits of the IPO, as opposed to the local Saudi elite pressured into supporting it. It has been reported that Saudi Arabia hopes to sell Aramco shares to as many as 7 million of the country’s 33 million citizens.
Independent investors are understandably concerned about corporate governance in a company that has until now been shrouded in secrecy. Saudi Arabia’s rulers don’t generally have a reputation for being open and transparent. And recent events such as the murder of journalist Jamal Khashoggi, an outspoken dissident and regime critic, in the kingdom’s Istanbul embassy last year, haven’t helped.
However, even at the lower end of the valuation, a $1.7 trillion price tag will put Aramco far ahead of Apple’s $1.2 trillion as the most valuable public company in the world. It was expected that even the sale of just 1.5% of the company would represent the largest ever IPO in history based on the sum raised. But at the lower valuation that now looks likely, the IPO may fall short of the $25 billion raised by Alibaba when it floated on the New York Stock Exchange in 2014.
Aramco has made some changes to its IPO documents, removing sections that refer to U.S. financial rules around the sale of securities. That is being taken to suggest that for now the IPO will stick to a local listing focused on local investment capital, rather than launching an international roadshow. It remains to be seen if and when a dual listing might take place on a major international exchange – a development that London has shown ambition in attracting, to the extent LSE rules were changed to allow it to happen.
A broader concern of potential investors is how quickly the world might move away from reliance on the internal combustion engine and oil as a power source over the next couple of decades. The pace at which the climate crisis currently appears to be moving is leading many analysts to suspect that could potentially accelerate the pace of change. That could, potentially, lead to a drop in international demand for oil significant enough to hurt the long term revenue streams of Saudi Aramco enough to seriously undermine its proposed valuation. Regional instability, as evidenced by recent drone attacks on Saudi oil facilities that many believe, despite its denials, Iran to be behind, is another risk analysts do not believe is suitably priced into the current valuation.
Saudi Aramco’s IPO documents pledge a dividend of $75 billion to be paid out next year. At a valuation of $1.7 billion, that would represent a dividend yield of around 4.35%. That is relatively attractive and in line with the range within which the ‘super major’ giant oil companies currently pay out. Chevron will this year pay a dividend yield of 3.9% and Royal Dutch Shell 6.4%.