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Described as ‘the world’s largest initial public offering’ (IPO), Aramco shares started trading on 11 December. The state oil giant sold $25.6 billion of shares at $8.53 each, the top of the range at which they were marketed, and the company had orders for $119 billion of stock. About 4.9 million individual investors, almost 15% of the kingdom’s population, applied for the shares. Saudi Arabia sold only 1.5% of the company’s capital in the IPO.
Before Aramco, the biggest IPO in Saudi Arabia was for the National Commercial Bank in 2013, which sought to raise $6 billion. Energy Minister Prince Abdul Aziz bin Salman predicted that Aramco’s value could soon exceed the $2 trillion valuation targeted by his half-brother, Crown Prince Mohammed bin Salman (also referred to as MBS), just after the kingdom announced production cuts to support oil prices.
Financial advisers for the IPO said that the institutional tranche of Aramco’s planned IPO was almost three times oversubscribed, receiving orders worth $50.4 billion. According to Ellen Wald, president of Transversal Consulting, “Most IPOs are oversubscribed. The shareholder [Saudi government] can decide to make more shares available to accommodate demand if it chooses.”
A survey by brokerage Bernstein of 31 asset managers holding assets of $3.8 trillion showed that most of them believe that Aramco is overvalued by up to a third. The survey amounts to further evidence that interest in Aramco shares among international investors is unlikely to be great because of too many uncertainties, including the degree of transparency that international investors are accustomed to. This lack of transparency could be a consequence of the 14 September attack on Saudi Arabia’s major oil production facilities, which forced the kingdom to accelerate its bidding on oil production.
According to Bernstein, ‘While this does not mean the IPO will be a failure, it does mean that share gains will be highly dependent on oil price. Indeed, the lack of external funds raised by the IPO, plus the pressure to make the privatization a success for domestic Saudi shareholders, are yet more reasons that the Kingdom of Saudi Arabia will want higher oil prices.’ It added in conclusion that Aramco had ‘missed an opportunity by not pricing the IPO at a level which would be attractive to institutional investors’. Indeed, Aramco plans to rely heavily on ultra-wealthy Saudis, many of whom have been pressed to invest, to get the deal done. Saudi banks are loosening lending regulations to allow locals to buy more shares.
Saudi Arabia is counting on this source of revenue to realize MBS’ ‘Vision 2030’. The main aim of this ambitious economic plan is to reduce the country’s dependence on oil by introducing a more diversified economic portfolio. It involves raising the share of non-oil exports from 16 per cent to 50 per cent of the non-oil gross domestic product (GDP) as well as localizing the renewable energy and industrial equipment sectors, boosting tourism and developing the private sector.
Aramco is a central part of this plan, as Wald explained to Fanack. “Saudi Arabia is seeking to monetize Aramco. The money generated by the sale is not intended to go to the company but rather to the Saudi Arabian government. The Saudis claim they want to use the money to make investments designed to diversify the Saudi economy, but it is unclear how they intend to do this. The funds are at the government’s discretion.”
A week before the IPO, Saudi Arabia attended the OPEC conference in Vienna, where it led a deal with Russia and other oil-producing allies to deepen oil output cuts in the first quarter of 2020, with the aim of addressing oversupply and supporting prices. The group of more than 20 producers agreed to cut an extra 500,000 barrels per day (bpd) to take their target to 1.7 million bpd, or 1.7% of global demand.
Energy Minister Abdul Aziz bin Salman said effective cuts could be as much as 2.1 million bpd as Saudi would carry on cutting more than its quota. This decision should not affect Aramco’s IPO, according to Wald, as oil prices have not moved substantially higher.
In what seems to be a case of history repeating itself, Saudi Arabia appears once again to be moving unburdened and untouched towards its national objectives, prioritizing local investments to prevent foreign policy and global insecurity from affecting its progress.