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Domestic only—the key aspect of Aramco IPO

The state energy giant’s decision to proceed with a share sale is no surprise, but the lack of an international listing is a crucial point

“A significant milestone in the history of the company and important progress towards delivering Saudi Vision 2030”. Thus Yasir al-Rumayyan, chairman of state-owned oil production Saudi Aramco and governor of the country’s Public Investment Fund (PIF), described the early November announcement that the firm would pursue a public offering of a small volume of its shares on the Saudi domestic stock exchange.    

The timing of the initial public offering (IPO) —and, at times, even whether it would ever happen—had been the subject of speculation, almost since the idea that a small portion of Aramco would be offered to the public was first mentioned in April 2016, when Crown Prince Mohammed bin Salman (MbS) announced his strategy for weaning Saudi Arabia off its oil dependence—Vision 2030. 

The planned IPO is a central plank in that strategy, with the PIF tasked with investing money raised from the sale in projects to develop the non-oil sector of the economy. Since 2016, progress on Vision 2030 has been slower than the early optimistic predictions. MbS said confidently that year that “by 2020, if oil stops we can survive—we need it, but I think in 2020 we can live without oil”. 

Inducements to establish a dividend could undermine Aramco’s role as the key driver of state income.

Now, with 2020 approaching, there is at least a commitment to put one of the key foundation stones of the strategy in place. A brief Aramco statement on the decision to proceed offered few details, saying only that the offering would be on the main market of Tadawul [the Saudi stock exchange]. The announcement spoke of “a portion” of government shares in Aramco being sold. The percentage on offer “will be determined at the end of the book-building period”. 

The Saudi government’s decision to commit to the IPO was no surprise, says Bill Farren-Price, director of RS Energy Group, a Calgary-based analysis firm. “Since the summer, and despite the attacks on Abqaiq, it has been clear that the kingdom’s senior leadership wanted to move ahead with it as quickly as possible.” 

But the crucial point is that the launch is in the Saudi market alone, Farren-Price adds. Those hoping to buy “are not international institutional investors looking for more exposure to an oil equities sector already in retreat”. “More, they are wealthy Saudis who are being asked to sign up for shares in a company that will trade locally under local supervision and regulation. Whether a secondary international listing goes ahead now is hardly a priority. Rather the establishment of a strong value for Aramco shares is.” 

Record beater

When the IPO was first mooted, the expectation was that around 5pc of Aramco shares would be offered for sale, in the kingdom and abroad. With the listing now confined to Tadawul, the offering could be limited to 1-2pc, but still raising potentially up to $40bn, taking it above the previous record listing of $25bn. 

At this stage, the IPO decision is highly unlikely to be reversed. But questions remain about its impact on the economy. Inducements to establish a dividend that is guaranteed for several years could undermine Aramco’s role as the key driver of state income. 

This could cause problems, especially if there is a period of weaker oil prices, which looks potentially likely in 2020. “It is going to be a difficult balancing act for the government: to make Aramco shares attractive, but limit state income in the process,” says Farren-Price. “Or they could adjust the royalties to yield more income to the state at the expense of the other investors. This is no doubt a landmark IPO for the world’s most profitable company—but there are plenty of hurdles to overcome.”

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