Record-Breaking IPO: Saudi Oil Giant Aramco Going Public

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Since 1945, the world has seen an era of American leadership. Now, with the populist mindset swaying in favor of protectionist policies and the 2008 Financial Crisis still reverberating in the pockets of the public, a new stage has been set with the receding role of the US in international leadership. Reminiscent of, though not entirely resembling, the American isolationist period of the 1930s, this power vacuum will grow and peak in 2018, when the full impact of the Congressional budget comes into play. The fair question: which actors will fill this vacuum, and with what currency?

Percent change of budget, based on the Trump Administration’s preliminary 2018 proposal // The Washington Post [1]
Enter Saudi Aramco, a private oil company that currently supplies one out of every nine barrels of oil produced in the world [2]. Founded by the Standard Oil Company of California, now Chevron, in 1933, shares were completely bought out by the government of Saudi Arabia by 1980 [3]. Whilst contributing up to nine-tenths of Saudi revenues [4], the global perception of climate change and the subsequent push for renewable, non-oil, energy resources has prompted Saudi Arabia to propose a hard-turn diversification program – Vision2030 [2]. The plan begins with the Initial Public Offering (IPO) of up to 5% of Aramco stake by late 2018, with a predicted price at $100 billion [3], trumping Alibaba Group’s record-bearing offering of $25 billion in 2014 [5].

 

Comparison of Aramco’s potential offer to previous offerings // Bloomberg [5]

The Saudi Arabian government has stated that the valuation of the company will by $2 trillion on the public market [2], but other estimates, like that of Wood Mackenzie Ltd., come up with a valuation of $400 billion [5]. However, these lower bound estimates are based on the current financial structure of the company, and with JPMorgan working with the Saudi authorities on broad changes in regards to regulatory exposure, disclosure rules, dividend policy and exchange listing options, this valuation estimate is likely to be higher [2].

Further, the Saudi government’s financial restructuring and other initiatives in line with Vision2030 will be the greatest factors of success before this momentous listing. One such government scheme is the Citizen’s Account, which will dole out $6.7 billion worth of public disbursements in 2017, increasing to almost $20 billion by 2020, in order to limit the influence of energy price increase on citizens and subsequently soften the effect of austerity measures. Additionally, a new excise tax on ‘harmful products’, like tobacco and energy drinks, will begin, along with a 5% value-added tax in 2018 [6]. As well as that, there have been talks to review Aramco’s income tax rate from 85% to as low as 50% [7]. Further, the biannual reduction of fuel, water and electricity subsidies that started in 2015 will continue. Moreover, to counter the current slowdown, considering the 3.4% to 1.1% growth from 2015 to 2016 and an expectant growth of 0.9% in 2017, a stimulus package of almost $60 billion will be allotted until 2020 [6].

Along with the dynamic attitude of the Saudi government, Aramco’s own restructuring and diversification projects are underway. Advisors and company executives are discussing whether to make Aramco a ‘global industrial conglomerate’ or a ‘specialized international oil company’. Leaning towards the former, Saudi officials are considering the reformation into something reminiscent of a ‘Korean chaebol’, a reference to South Korean family-owned conglomerates, thus expanding the company’s role in petrochemicals and other sectors. As Aramco begins to diversify, with a $5 billion ship repair and construction complex on the East coast, $400 billion forging and casting projects with General Electric and plans to build solar and wind power facilities, the risks of investment become more diverse and the company gets harder to value [7]. However, the synchronization of company and government initiatives, as enabled by Deputy Crown Prince Mohammad bin Salman Al Saud, doubling as the owner of Aramco and chairman of the Council for Economic and Development Affairs, will result in the growth and valuation of the company at a much higher level than some anticipate.

Even when withholding the effects of diversification, Aramco is still expanding its natural gas production capacity, and wants to double it from 12 billion to 24 billion cubic feet per over the next 10 years [8]. And given that the oil market will continue to perform well, as it has done since the production cut in November 2016 when OPEC reached an output agreement [5], Aramco’s success in this sector seems inevitable.
OPEC Performance after the production cuts // Bloomberg [5]
With the ambitious objective to create a sovereign wealth fund that will anchor Saudi state revenue by 2030, there’s no doubt this IPO will have a monumental impact on the cash flows of the East. A survey conducted by investment bank EFG Hermes at an investment conference in Dubai, polling 510 international fund managers, shows that 63% predict Aramco’s market capitalization to be over $1 trillion, while 36% predict under $1 trillion [9]. Such a valuation falls in the middle, though leans upward, between Saudi Arabia’s prediction and Wood Mackenzie Ltd.’s harsher rough valuation of $400 billion. 
Comparison of the valuation of publicly traded companies, highlighting Aramco’s potential // Bloomberg [10]
If the valuation were to reach the upper bound, Aramco could swallow Apple twice and still have enough room for Google’s parent, Alphabet. On the lower bound, the company would still shake up and redistribute markets and begin its capitalist conquest through mergers, acquisitions, investments at an entrance point just above Facebook. With a 5% float of the company, the number of shares of Aramco available for trading, the company is estimated to account for 2.4% of the MSCI Emerging Markets Index’s gauge. This would thrust Aramco into the top five, alongside Samsung and Alibaba, and inflows to the Saudi Arabian foreign money market are expected to be at $6.6 billion from MSCI trackers and $2.5 billion from FTSE investors [5].
However, the Tawadul, Saudi Arabia’s Stock Exchange, has a market cap of only $440 billion, and so Aramco will seek out another Exchange, or multiple others, to list itself on. Preference is for a listing in the NYSE, despite a Congressional law being passed in 2016 that could allow American terror victims to sue Saudi Arabia. This, along with Trump’s islamophobic rhetoric, has potential to derail a NYSE listing [11], or elicit partial listings in multiple Exchanges, in which case the London, Toronto, Singapore and Hong Kong Exchanges are other stated options [5]. Regardless of the listing location, as trade barriers go up in Europe and the US enters an era of isolationism, Chinese and OPEC influence will rise and their bond will create the foundations of this global power shift.

 

References

[1] https://www.washingtonpost.com/graphics/politics/trump-presidential-budget-2018-proposal/?utm_term=.7483d7263da8
[2] https://www.ft.com/content/99353918-ed8c-11e6-930f-061b01e23655
[3] https://www.forbes.com/sites/ellenrwald/2017/02/25/the-worlds-biggest-ipo-is-coming-what-you-should-know-about-aramco/#29110053535f
[4] http://knowledge.wharton.upenn.edu/article/boutique-firm-landed-big-role-aramco-ipo/
[5] https://www.bloomberg.com/news/articles/2017-02-26/this-is-all-the-ways-a-saudi-aramco-ipo-could-impact-markets
[6] https://www.bloomberg.com/news/articles/2017-03-06/aramco-ipo-prep-on-powerful-saudi-prince-s-long-2017-to-do-list
[7] http://www.reuters.com/article/us-saudiaramco-ipo-restructuring-idUSKBN15W1ZB
[8] https://www.bloomberg.com/news/articles/2016-10-06/saudi-aramco-ipo-will-offer-stake-in-all-of-company-s-operations
[9] http://uk.businessinsider.com/investors-expect-saudi-aramco-ipo-to-value-at-one-trillion-2017-3
[10] https://www.bloomberg.com/news/articles/2017-02-23/saudi-arabia-2-trillion-aramco-vision-runs-into-market-reality
[11] http://www.marketwatch.com/story/saudi-arabia-favors-new-york-for-aramco-ipo-2017-02-21

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