Aramco overcame sceptical West,
geopolitical risks and climate concerns to pull off the world’s biggest share
sale IPO has given KSA international capital market status and the confidence
to play a global role in the financial world DUBAI: On Dec. 11, Yasir
Al-Rumayyan and Amin Nasser — chairman and chief executive respectively of
Saudi Aramco — rang the opening bell at the Tadawul stock exchange in Riyadh in
a shower of ticker-tape, and therefore the Kingdom’s business and economic
scene was changed forever. Al-Rumayyan, who had pushed through the initial
public offering (IPO) of shares within the face of some opposition from Western
financial advisers, spoke of a “proud and historic moment” as he described the
event as a “milestone” on the Vision 2030 path to the Saudi economy’s
diversification away from oil dependency. Others thought the IPO’s true
It is also likely
to accelerate the Kingdom’s eastward tilt, faraway from the large financial
centers of latest York and London and towards the growing Asian hubs, such as
Tokyo and Hong Kong. One executive for an Asian finance house in the Middle
East, who didn't wish to be named, said: “Some people say floating alittle
percentage will make no difference, but that misses the point. Aramco has
signed up to Tadawul’s standards of transparency and accountability, and no
other national company has got to obey stock exchange rules like that.” The
opening ceremony was the culmination of a process that began in late 2016, when
the crown prince stunned the world with the news that he was considering a
stock market flotation for the biggest oil exporter in the world. A Saudi
Aramco oil processing facility within the Eastern Province. The company’s IPO
is probably going to accelerate the Kingdom’s eastward tilt, faraway from the
large financial centers of latest York and London and towards the growing Asian
hubs, such as Tokyo and Hong Kong. (Getty Images) Back then, it had been
suggested around 5 percent of Aramco could be sold, that the corporate might be
valued at $2 trillion, which the IPO would happen pretty quickly. Those plans
evolved and adapted to changing circumstance. Last year, at the planet Economic
Forum annual meeting in Davos, Nasser told Arab News that the biggest single
reason for the delay in the IPO was the desire to strengthen Aramco’s position
in the booming downstream petrochemicals sector with the acquisition of SABIC.
That deal went through early last year, removing the last strategic obstacle to
the IPO. The valuation had been a matter of debate ever since the IPO plans
were first announced. Seasoned observers of the financial markets agree that
there is nothing unusual about a difference of opinion between the vendor (the
government of Saudi Arabia in this case) and potential buyers (the
international investment community). Both are looking to maximize their return
on the deal. With a corporation as big and strategically significant as Aramco,
other factors inevitably came into play during the complex negotiations between
the govt and its advisers. The oil price — inevitably an enormous element in
determining Aramco profitability and thus valuation — was struggling throughout
the IPO drawing board as American shale flooded global markets. As a number one
member of OPEC, the dominion took action, in partnership with Russia and other
non-OPEC oil producers, to stabilize the worth. FASTFACT 6x - Consulting firm
Thunder Said Energy found Saudi Aramco to be six times more efficient than
ExxonMobil and Chevron in both current emissions and targets for future
reduction as a proportion of its gas production. Then, just as details were
being finalized for the publication of the IPO prospectus — the crucial
document on which the valuation is assessed — the risks of doing business in
the Middle East were thrown into stark relief with the Iranian attacks on
Aramco facilities at Abqaiq and Khurais. With “geopolitical risk” on top of
analysts’ minds, another negative had been thrown into the valuation process,
despite Aramco’s rapid recovery from the attacks, which had the potential to
dramatically alter the IPO arithmetic in turbulent global energy markets. The
whole pricing process was also conducted against the backdrop of a changing
investors attitude to “Big Oil” companies because the debate intensified about
the simplest thanks to tackle global climate change.
https://drive.google.com/file/d/1TN_BIBo4USHkSlyb9wDXUL4uiBiCbdml/view
significance was even more profound. Ali Shihabi, well-known commentator on Saudi
affairs, said the offering was a “monumental development” as a part of the
“cultural shock therapy” under way within the Kingdom, under the guidance of a
new generation of reformist policymakers led by Crown Prince Mohammed bin
Salman. The IPO has instantly given Saudi Aramco the status of the world’s most
precious company, made the Kingdom’s ambitious sovereign wealth fund, the
general public Investment Fund, richer by roughly $30 billion, and catapulted
Tadawul into the highest flight of worldwide stock exchanges. But, perhaps more
significant, it's also the primary stage during a process that would see
further sales of Aramco shares, with a listing on a foreign stock exchange a
distinct possibility in the near future. On top of the hugely oversubscribed
$12 billion bond Aramco issued earlier in the year, the IPO has given Saudi
Arabia a certain cachet in the international capital markets and the
self-confidence to play a global role in the financial world. It is also likely
to accelerate the Kingdom’s eastward tilt, faraway from the large financial
centers of latest York and London and towards the growing Asian hubs, such as
Tokyo and Hong Kong. One executive for an Asian finance house in the Middle
East, who didn't wish to be named, said: “Some people say floating alittle
percentage will make no difference, but that misses the point. Aramco has
signed up to Tadawul’s standards of transparency and accountability, and no
other national company has got to obey stock exchange rules like that.” The
opening ceremony was the culmination of a process that began in late 2016, when
the crown prince stunned the world with the news that he was considering a
stock market flotation for the biggest oil exporter in the world. A Saudi
Aramco oil processing facility within the Eastern Province. The company’s IPO
is probably going to accelerate the Kingdom’s eastward tilt, faraway from the
large financial centers of latest York and London and towards the growing Asian
hubs, such as Tokyo and Hong Kong. (Getty Images) Back then, it had been
suggested around 5 percent of Aramco could be sold, that the corporate might be
valued at $2 trillion, which the IPO would happen pretty quickly. Those plans
evolved and adapted to changing circumstance. Last year, at the planet Economic
Forum annual meeting in Davos, Nasser told Arab News that the biggest single
reason for the delay in the IPO was the desire to strengthen Aramco’s position
in the booming downstream petrochemicals sector with the acquisition of SABIC.
That deal went through early last year, removing the last strategic obstacle to
the IPO. The valuation had been a matter of debate ever since the IPO plans
were first announced. Seasoned observers of the financial markets agree that
there is nothing unusual about a difference of opinion between the vendor (the
government of Saudi Arabia in this case) and potential buyers (the
international investment community). Both are looking to maximize their return
on the deal. With a corporation as big and strategically significant as Aramco,
other factors inevitably came into play during the complex negotiations between
the govt and its advisers. The oil price — inevitably an enormous element in
determining Aramco profitability and thus valuation — was struggling throughout
the IPO drawing board as American shale flooded global markets. As a number one
member of OPEC, the dominion took action, in partnership with Russia and other
non-OPEC oil producers, to stabilize the worth. FASTFACT 6x - Consulting firm
Thunder Said Energy found Saudi Aramco to be six times more efficient than
ExxonMobil and Chevron in both current emissions and targets for future
reduction as a proportion of its gas production. Then, just as details were
being finalized for the publication of the IPO prospectus — the crucial
document on which the valuation is assessed — the risks of doing business in
the Middle East were thrown into stark relief with the Iranian attacks on
Aramco facilities at Abqaiq and Khurais. With “geopolitical risk” on top of
analysts’ minds, another negative had been thrown into the valuation process,
despite Aramco’s rapid recovery from the attacks, which had the potential to
dramatically alter the IPO arithmetic in turbulent global energy markets. The
whole pricing process was also conducted against the backdrop of a changing
investors attitude to “Big Oil” companies because the debate intensified about
the simplest thanks to tackle global climate change.
Despite being the biggest exporter
of fossil fuel in the world, Aramco has strong credentials in the environment
lobby, with low levels of pollutants from its production and refining processes
and a high level of investment in new, anti-polluting technology.
Another factor cited as a headwind
when the shares were being priced was Western reaction to the murder of
journalist Jamal Khashoggi the previous year, though this had not prevented
investors in New York and London from subscribing to the Aramco bond a few
months earlier.
By mid-November, when the final
decision on pricing had to be taken, there was a huge range in the valuations
as assessed by the small army of international and regional financial
institutions advising on the IPO.
At a fractious meeting in Riyadh,
one banker was reported as saying “there is real tension in the banking
syndicate.”
Al-Rumayyan cut through the dissent
with a simple formula: The IPO would not be marketed in Western financial
centers like London and New York, and would instead focus on Saudi and regional
investors.
The Westerners had been the leading
advocates of a lower valuation, and Aramco advisers explained that there was
little sense in marketing to them when they had been dragging their feet on the
valuation.
In any case, ample provision had
been made for foreign investors to take up shares in the IPO via the Tadawul.
That logic turned out to be amply
justified. At a compromise valuation of around $1.7 trillion, there was more
than enough demand in the region when the share sale was finally launched.
The offer was nearly five times
oversubscribed in total, implying that more than $100 billion of demand was
chasing only $26 billion worth of shares.
Among Saudi investors, there was
big demand for the flagship offering. Some 5 million citizens and expat
residents bought shares in the offering to become equity partners in the
company that has been at the heart of the Kingdom’s prosperity for more than 80
years.
They can look forward to a healthy
dividend stream as well as bonus shares if they hold on to their stake for a
minimum of six months.
So far, they have had no reason to
regret their decision to invest in the world’s most profitable company.
In contrast to many big IPOs in
2019 — like ride-hailing firms Uber and Lyft, not to mention the aborted
flotation of WeWork — Aramco shares surged on opening, and soon hit the $2
trillion valuation, allowing the Kingdom to tick another box of the IPO
check-list.
Drone attacks in September sparked
fires at two Saudi Aramco oil facilities in Abqaiq but they recovered quickly
from the attacks. (AFP)
It has since fallen back, but is
still above the issue price. Investment bank adviser Goldman Sachs has shares
in reserve to smooth out price fluctuations.
With the dividend already set in
stone, there are two main, interconnected factors that will determine the share
price going forward — Aramco’s underlying level of profitability, and the price
of oil on international energy markets.
“If oil prices stay consistently in
the $70-$80 range, there will be greater interest in global oil stocks
generally,” said the executive of the Middle East-based Asian finance house.
But the OPEC+ limits on production
could also affect Aramco profits for the current year, he warned.
“Overseas skepticism about the
valuation has not disappeared,” the financier added, implying that the mainly
Western banks that tried to talk down the IPO price would not buy shares at
current prices.
But in that case, Aramco has
another trick up its sleeve. There are plans under discussion to list the
shares on an Asian stock market, with Tokyo edging ahead of Hong Kong as the
preferred venue. Asian investors are likely to appreciate Aramco’s robust
dividend, and are equally keen to ensure strong trading ties with their main
supplier of crude oil.
The logic is for Aramco to look
further eastwards, away from the skeptical West. “Asia has been Aramco’s
primary growth market since the 1990s, when Ali Al-Naimi (former Aramco
president and Saudi energy minister) identified it as the largest center for
future oil demand,” Ellen Wald, American energy consultant and author of the
book Saudi Inc, told Arab News.
“When people notice a so-called
‘move to Asia,’ they are just noticing a decades-old plan.”
Despite being the most important exporter of fuel within the
world, Aramco has strong credentials within the environment lobby, with low
levels of pollutants from its production and refining processes and a high
level of investment in new, anti-polluting technology. Another factor cited as
a headwind when the shares were being priced was Western reaction to the murder
of journalist Jamal Khashoggi the previous year, though this had not prevented
investors in New York and London from subscribing to the Aramco bond a few
months earlier. By mid-November, when the ultimate decision on pricing had to
be taken, there was a huge range in the valuations as assessed by the small
army of international and regional financial institutions advising on the IPO.
At a fractious meeting in Riyadh, one banker was reported as saying “there is
real tension within the banking syndicate.” Al-Rumayyan cut through the dissent
with a simple formula: The IPO would not be marketed in Western financial
centers like London and New York, and would instead focus on Saudi and regional
investors. The Westerners had been the leading advocates of a lower valuation,
and Aramco advisers explained that there was little sense in marketing to them
when they had been dragging their feet on the valuation. In any case, ample
provision had been made for foreign investors to require up shares within the
IPO via the Tadawul. That logic turned out to be amply justified. At a
compromise valuation of around $1.7 trillion, there was quite enough demand
within the region when the share sale was finally launched. The offer was
nearly five times oversubscribed in total, implying that quite $100 billion of
demand was chasing only $26 billion worth of shares. Among Saudi investors,
there was big demand for the flagship offering. Some 5 million citizens and
expat residents bought shares in the offering to become equity partners in the
company that has been at the heart of the Kingdom’s prosperity for more than 80
years. They can look forward to a healthy dividend stream as well as bonus
shares if they hold on to their stake for a minimum of six months. So far, they
need had no reason to regret their decision to take a position within the
world’s most profitable company. In contrast to several big IPOs in 2019 — like
ride-hailing firms Uber and Lyft, to not mention the aborted flotation of
WeWork — Aramco shares surged on opening, and soon hit the $2 trillion
valuation, allowing the dominion to tick another box of the IPO check-list.
Drone attacks in September sparked fires at two Saudi Aramco oil facilities in
Abqaiq but they recovered quickly from the attacks. (AFP) It has since fallen
back, but remains above the difficulty price. Investment bank adviser Goldman
Sachs has shares in reserve to smooth price fluctuations. With the dividend
already set in stone, there are two main, interconnected factors which will
determine the share price going forward — Aramco’s underlying level of
profitability, and the price of oil on international energy markets. “If oil
prices stay consistently in the $70-$80 range, there'll be greater interest in
global oil stocks generally,” said the chief of the center East-based Asian
finance house. But the OPEC+ limits on production could also affect Aramco
profits for the present year, he warned. “Overseas skepticism about the
valuation has not disappeared,” the financier added, implying that the mainly
Western banks that tried to talk down the IPO price would not buy shares at
current prices. But in that case, Aramco has another dress up its sleeve. There
are plans under discussion to list the shares on an Asian stock exchange, with
Tokyo edging before Hong Kong because the preferred venue. Asian investors are
likely to understand Aramco’s robust dividend, and are equally keen to make
sure strong trading ties with their main supplier of petroleum. The logic is
for Aramco to seem further eastwards, faraway from the skeptical West. “Asia
has been Aramco’s primary growth market since the 1990s, when Ali Al-Naimi
(former Aramco president and Saudi energy minister) identified it as the
largest center for future oil demand,” Ellen Wald, American energy consultant
and author of the book Saudi Inc, told Arab News. “When people notice a
so-called ‘move to Asia,’ they're just noticing a decades-old plan.”