Saudi Aramco IPO Price Range Values Company at Up to $1.7 Trillion

We’ve been hearing about the Saudi Aramco IPO for years, and now we finally have a price range: $1.6 trillion to $1.7 trillion.

For those who don’t know about Saudi Aramco, it’s the most profitable business on Earth: Saudi Arabia’s state owned oil company. At around $2 a barrel, they have the lowest oil production costs in the world.

Since Saudi Arabia took the company private in 1976, nobody has been able to buy a stake in the world’s most profitable company… until now, as the kingdom floats 1.5% of the company in what could be the largest IPO ever.

The $1.7 trillion valuation actually fell short of $2 trillion goal initially targeted by the Crown Prince:

Saudi Arabia’s Aramco said it aims for a valuation of $1.6 trillion to $1.7 trillion from the planned initial public offering of the state-owned energy giant, falling well short of the initial $2 trillion targeted by Crown Prince Mohammed bin Salman in what could still be the world’s biggest ever IPO.

The Wall Street Journal

In a statement Sunday, Aramco said that it aims to price the offering at between 30 and 32 Saudi Arabian riyal (between $8 and $8.52) a share and sell a small stake of 1.5% or 3 billion shares in the IPO. At the midpoint of the price range, Aramco would raise almost $25 billion from the issue. In 2014, Alibaba Group Holding Ltd. raised $25 billion with its IPO.

The Wall Street Journal

My understanding is that most if not all of the $25 billion+ raised would go towards more modernization of Saudi Arabia’s economy, with a focus on reducing dependence on oil.

It would give the company a total valuation of $1.65 trillion. That would mark a big come down for the Crown Prince’s initial goal of selling $100 billion worth of stock in the IPO and the targeted $2 trillion valuation.

The Wall Street Journal

While a raise in the neighborhood of $25 billion would still be among the largest ever, it’s substantially less than the $100 billion initially planned.

That effort has included scores of meetings with sovereign-wealth funds and other big money managers in major financial centers in the U.S., Middle East, Asia, and Europe.

The Wall Street Journal

$TSLAQ is going to love this. Long oil is the perfect complement to a Tesla short.

As one of the world’s lowest-cost producers and biggest exporters of crude, Aramco has a proven record of making money. In the first nine months ending September, the energy giant posted a profit of $68 billion, exceeding the 2018 net figure of Apple Inc., the most profitable publicly traded company. However, Aramco’s figure was down year-over-year by 18%, amid weaker oil prices.

The Wall Street Journal

Apple will eventually overtake Aramco as the world’s most profitable publicly traded company.

The September attacks on Aramco’s oil facilities that briefly halved the Saudi company’s oil output also show how the threat of terrorist attacks can put its future earnings at risk. Hurt by purchases and other costs, Aramco’s third-quarter profit fell about 30% to $21.2 billion from the year-ago period, at a faster rate than the 17%-plus drop in crude prices over the same time.

The Wall Street Journal

Note that the electricity supply is much more difficult to disrupt in this way, because it’s much more distributed: Anyone can generate their own electricity at home, and nobody can stop them.

The shortfall underscores the challenges Aramco and its advisers have faced wooing international investors to participate in the offering. International investors have so far signaled that a $1 trillion to $1.5 trillion valuation would be more reasonable for them to consider investing, according to some investors who have met with underwriting banks. Aramco is selling up to 0.5% of the 1.5% stake to individual investors.

The company is expected to settle on the final IPO price and stake to be sold following the end of the so-called book-building process for institutional investors on Dec. 4, after which the shares are expected to list on the Saudi Stock Exchange or Tadawul.

The Wall Street Journal

The higher the valuation, the lower the dividend yield. By setting a target valuation below $2 billion and thus a higher dividend yield, Aramco is compensating investors for the risk of investing in a company that will remain an arm of the state even after going public. That’s because the Saudi government will continue to own the vast majority of the company, minimizing the influence of minority shareholders.

The Wall Street Journal

Don’t expect the same shareholder rights that are common at other public companies.

“The government may direct the company to undertake projects or provide assistance for initiatives outside [Aramco’s] core business, which may not be consistent with the company’s immediate commercial objectives or profit maximization”

The Wall Street Journal

I wonder what kind of projects they have in mind…

Read the full story at the Wall Street Journal

Leave a Reply