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Chalk one up for MbS

The Aramco IPO may fall short of his talismanic figure, but an anticipated result of the largest ever public offering is a rare win for the prince

The timing of the upcoming Saudi Aramco IPO looks peculiar in some ways, with Brent at $60/bl rather than $80/bl+, rising climate change activism and the Abqaiq attack exposing the vulnerability of Saudi infrastructure to armed drone and cruise missile attacks by non-state actors. But Crown Prince Mohammed bin Salman (MbS) is desperate for a victory after numerous foreign policy and public relations setbacks since becoming de facto ruler of the kingdom. 

To his credit, MbS appears to have put together a formula that could yet achieve the largest IPO in history, even if his much touted $2trn valuation for Aramco—twice the market worth of Microsoft, currently the world’s most valuable listed company, and seven times the market capitalization of ExxonMobil, the largest free-float oil firm—looks out of reach based on the most recent guide price for the shares. 

Getting the ducks in a row

In the first half of September, the crown prince stripped Khaled al-Falih, widely viewed as the third most powerful person in Saudi Arabia—after King Salman and MBS—from key positions within the kingdom’s bureaucracy and replaced him with people viewed as more amenable to an Aramco IPO, especially at the present time. 

Among potential international investors, the kingdom is gaining greatest traction with Chinese-related funds

In early September, Yasir al-Rumayyan, who has spent most of his career as a banker and was already leading Saudi Arabia’s $320bn Public Investment Fund (PFI), was appointed chairman of Aramco. Less than a week later, Prince Abdulaziz bin Salman, King Salman’s son, half-brother of MbS and a veteran oil official and price hawk, was named the new Saudi energy minister—a position from which Al-Falih exited at the end of August. 

In mid-August, Aramco had formally asked major banks to submit proposals for their potential roles in its upcoming IPO; speculation has centred on differences arising through this process as a major factor in the terminal rift between MbS and al-Falih. It has since brought more than 20 major banks on board, and, in doing so, has not only bought the expertise of the best financial minds on the planet to orchestrate the IPO, but has also provided cover for investors to pay relatively high prices for Aramco shares, whether through friendly encouragement or possibly stronger persuasion. 

Banks working on the listing projected a surprisingly wide $1.2tn to $2.3trn valuation range, with Goldman Sachs, named as stabilizing agent for the IPO in the early November prospectus, valuing Aramco at between $1.6tn and $2.3trn. Aramco’s statement at the weekend that it would aim to sell 1.5pc stake, or c.3bn shares, of the company in an indicative price range of SAR30-32 would value the IPO, in dollar terms, at $24-25.6bn and Aramco as a whole at $1.6-1.7trn. In contrast, Sanford C. Bernstein, a bank not involved in the deal, has said fair value is between $1.2-$1.5trn. 

Crucial tweaks

To orchestrate a successful IPO, the Saudi government has made some financial adjustments to make Aramco shares more attractive and, more importantly, has set up the structure of the IPO in such a way as to achieve both the highest possible valuation and record high revenue from the launch. 

On the financial front, the kingdom has cut Aramco’s tax burden three times since MbS first announced plans for an IPO in 2016, including reducing the tax rate on company profits from 85pc to 50pc and introducing a sliding royalty scale for oil production based on the price of Brent crude. The royalty rate for Brent prices up to $70/bl is to be cut by an additional five percentage points to 15pc effective 1 January. 

Aramco confirmed plans to pay an annual dividend of at least $75bn starting in 2020

In addition, earlier this month, Aramco confirmed plans to pay an annual dividend of at least $75bn starting in 2020, in addition to any special dividends. The $75bn figure translates to a dividend yield of 3.75pc, assuming MbS’ target $2trn valuation, similar to Chevron’s yield, but roughly one percentage point less than ExxonMobil’s yield and more than two points less than BP’s. 

In terms of the structure of the Aramco IPO, the kingdom is now planning to sell less than 2pc on the Saudi stock exchange, rather than the previously discussed 5pc on the Tadawul and at least one major international exchange. Retail investors will be able to bid for “up to 0.5pc” of Aramco shares from 17-28 November, while the rest will be offered to institutional investors in a 17 November-4 December window. Aramco will price its shares on 5 December, while trading will begin trading on the Tadawul in mid-December, according to the prospectus. 

By maintaining at least some flexibility on the amount of shares it will ultimately sell in the IPO, and given the pricing information from the offering period, the Saudi government may be trying to retain the potential of selling less shares to try to boost Aramco’s share price while still breaking the $25bn record high set by Chinese e-commerce giant Alibaba from its 2014 IPO. For example, Aramco would only need to sell slightly more than 1.25pc of the company’s shares to achieve a new IPO record, if it was able to achieve a share price that translated to a $2tn valuation. 

Drumming up appetite

In addition, since late September, the Saudi government has been approaching sovereign wealth funds in countries on relatively friendly terms with the kingdom, including rising geopolitical powers such as China and Russia, and wealthy Saudi families and individuals to encourage them to invest in the Aramco IPO and support a relatively high share price. 

Among potential international investors in the Aramco IPO, the kingdom appears to be gaining greatest traction with Chinese-related funds and companies. While the the final decision and commitment of these potential Chinese buyers will depend on government approval, this should not be an issue as the Xi regime has been strengthening political and economic ties with Saudi Arabia in recent years—not least as part of its global tussle for influence with the kingdom’s traditional geopolitical ally, the US. 

$1.2tn-$2.3trn The banks' valuation range

The Saudi government is also known to have approached the Abu Dhabi Investment Authority, Russia’s RDIF, Singapore’s GIC, and the world’s largest sovereign wealth fund, Norway’s $1tn Government Pension Fund Global. Perhaps due to its rather schizophrenic approach to oil and gas investing, the Norwegian fund has already indicated it has no plans to invest in the Aramco IPO, while the RDIF’s desire to de-risk Russia’s economic reliance on hydrocarbons is also unlikely to be a big buyer. 

On the home front, it has been reported that wealthy Saudi families and individuals, including the Olayans, Almajdouies, the Al-Turki clan and Prince Alwaleed Bin Talal, have been approached by the Saudi government and asked to invest in the IPO, while commoners are being told through a sophisticated public relations campaign that it is their patriotic duty to buy shares. 

The participation of wealthy families and individual in the Aramco IPO should be strong, especially with the Saudi ‘night of the long knives’ a recent memory. Saudi authorities claim to have secured $100bin through settlements in the alleged anti-corruption campaign, after arresting almost 200 of its wealthiest citizens, including leading members of the royal family, in November 2017 and holding them captive at a Riyadh luxury hotel. 

As an added incentive for Saudi retail investors, especially less affluent ones, and to help support the Aramco share price in the short-term, Aramco is offering one free share for each 10 bought and held for 180 days, up to a maximum of 100 shares. Low-cost loans are also being made available to Saudi nationals to purchase company shares. 

Thus, MbS appears to have created an apparently winning formula for his Aramco IPO. While the final valuation now looks less likely to hit $2trn, it should be close— while the revenue generated from the IPO will get sufficiently close that, even if a bit of light financial engineering may be required, it should set a record high. But, in part because the reasons for the IPO appearing untimely are unlikely to go away, and due to the somewhat orchestrated nature of the IPO process itself, Aramco is likely to be worth significantly less than $2trn in the longer-term. 

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