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Saudi Aramco: Blockbuster IPO set for December

12 November 2019

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by Marco de Matos, Research

Saudi Arabia’s state-owned integrated oil and gas company, Aramco (Arabian-American oil company), announced the launch of its long-awaited initial public offering (IPO) on 3 November. It has also received regulatory approval for what could be the world’s largest-ever IPO and on 9 November released a 658-page prospectus. The listing on the Saudi Stock Exchange or Tadawul is scheduled to take place on 11 December. The Saudi government will reportedly sell 2% of Aramco in the domestic listing but, according to Bloomberg, an international IPO has been ruled out for at least a year.

According to Saudi Aramco President and CEO Amin Nasser, the firm’s vision “is to be the world’s pre-eminent integrated energy and chemicals company.” Saudi Crown Prince Mohammed bin Salman is reportedly selling the shares to further his Vision 2030 economic reform agenda by raising billions of dollars to diversify Saudi Arabia’s economy away from fossil fuels by investing in non-energy industries. Aramco has been valued at c. $2trn by bin Salman, but Reuters cites bankers and company insiders as saying that its value is likely closer to $1.5trn.

Below, we highlight some of the points coming out of the prospectus:

  • Saudi Aramco will sell 0.5% of its shares to private investors (including Saudi nationals, qualifying resident expatriates, and Gulf Cooperation Council (GCC) citizens), but no final decision has been made on the percentage of shares available to larger institutional buyers.
  • The bookbuild will start on 17 November.
  • The offering for institutional investors will also start on 17 November and end on 4 December, while retail investors will be able to bid for shares from 17-28 November.
  • Following its flotation, Aramco will not list any more shares for six months and will also be restricted from issuing additional shares for 12 months after its IPO.
  • The final share price will be determined on 5 December and the company is expected to start trading on the Saudi bourse six days later.
  • $1bn worth of shares will be made available to employees.
  • No details have been given around how much of the company will be floated in total or around any commitments from cornerstone or institutional investors.
  • The prospectus paints a far more optimistic picture of future global crude oil demand than many other recent projections.
  • Analysts from banks that are working on the listing, project a value of between $1.2 and $2.3trn for Aramco. At the top valuation, Aramco could potentially raise $40bn, making its listing the biggest ever, eclipsing Alibaba’s 2014 $25bn New York IPO.
  • The downstream side of the business was highlighted as a strategic priority area, which will see steady expansion. The demand for refined products is forecast to average 0.8% until 2030, with a surge in the global requirement for ethylene (especially from China and North America), expected.
  • Aramco supplies 13% of the world’s oil and, according to the company, its crude oil production accounted for c. one in eight barrels of crude oil produced globally from 2016-2018. In 1H19, Aramco produced 13.2mn barrels/day of oil equivalent, including 10.0mn barrels/day of crude oil (which includes blended condensate).
  • Saudi Aramco has a gross refining capacity of 4.9mn barrels of oil/day, ranking it as the world’s fourth-largest integrated refiner. Its strategy of integrating upstream and downstream activities means that “it can secure crude demand by selling its dedicated refining activities to global trade partners.” Refining capacity in Saudi Arabia accounts for 62% of the worldwide net refining capacity.
  • A key area of Aramco’s future strategy is natural gas. This, as Saudi Arabia moves away from oil as a power-generation fuel. The demand for gas is expected to increase by 3.6% p.a. until 2030, “primarily due to an increase in demand from the power generation and the refining and industrial sectors.”
  • Global crude oil demand is forecast to grow 0.8% from 2018-2030, with demand growth from non-OECD Asia Pacific and other developing countries expected to help mitigate a lowering in crude oil demand caused by the availability of alternative energy sources.
  • According to analysts, an important financial strength of Aramco which should command a premium on its valuation is the sustainable free cash flow (FCF) it can generate. Unlike independent oil markets peers (Exxon Mobil, Chevron, BP, Shell etc.), Aramco does not need to spend large amounts of capital every 10-15 years on replacing its oil reserves. All the sustainable FCF it generates (amounting to as much as $120bn p.a.) can be reinvested into growth areas, R&D, and to help pay the dividend which has been set at a minimum of $75bn for IPO investors.
  • In 1H19, when production was limited by an agreement with non-OPEC oil producers, Aramco still produced 13.6mn barrels of oil equivalent/ day, including c. 10.3mn barrels of crude.
  • Between 2016 and 2018, Aramco pumped c. one in eight barrels of oil produced in the world daily.
  • Aramco’s output has seen it become by far the biggest global profit earner. In FY18, Aramco’s net profit of $111bn was higher than that of the biggest listed companies in the world (Apple, Google etc.). Its 1H19 profit of $46.9bn was more than that of the next six biggest oil companies combined. It reportedly costs the firm only $2.80 to lift a barrel of oil, vs the c. $62/bbl price paid in world markets, resulting in its huge profits.
  • Its operating cashflow in 2018 was $121bn and it will pay out dividends of $75bn this year.
  • In terms of cash generation, 1H19 saw Aramco record $52bn-plus of net cash from operating activities and $38bn of FCF. It has low borrowings, and only entered global debt markets (with a record $12bn bond), earlier this year.
  • Possible risks mentioned in the prospectus include government control over oil output (the Saudi government can decide on maximum crude output and direct the firm to undertake projects which may fall outside its core business), the possibility of encountering antitrust legislation and terrorist attacks.
  • Aramco also has the right to change its dividend policy without prior notice to minority shareholders. However, to reassure potential investors, the Saudi government has said that it would forego its share of dividends if there is an oil price collapse, thus in effect creating a company guaranteeing dividends of $75bn p.a.
  • The prospectus did not include details around how much of the company would be floated in total or of any commitments from institutional investors.

The Aramco IPO has been expected for several years, but has reportedly been delayed because of oil price volatility, valuation uncertainty, the location of the share listing and geopolitical events such as the drone attack on Saudi oilfields in September. If the firm achieves a valuation of $1.5trn, it would exceed the market capitalisations of companies such as Apple and Microsoft at $1.2trn and $1.1trn, respectively, as at the close on 8 November.

A copy of the prospectus can be found here.

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