Fri. Nov 15th, 2019

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Analyst on Saudi hopes for Aramco flotation

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(3 Nov 2019) Saudi Arabia formally began an initial public offering Sunday of a sliver of oil giant Saudi Aramco after years of delay, hoping international and local investors will pay billions of dollars for a stake in the kingdom’s crown jewels.
Oil industry analyst Ranjith Raja said the offering would “generate a huge amount of interest as soon as it opens.”
An approval by Saudi Arabia’s Capital Market Authority served as the starting gun for an IPO promised by Crown Prince Mohammed bin Salman since 2016. But unlike traditional IPOs, Saudi Aramco offered no hoped-for price range for its shares nor any idea how much of the firm would be offered to investors on Riyadh’s Tadawul stock exchange.
Analysts say the kingdom likely hopes local investors will push its share prices toward a desired 2 trillion US dollars valuation and buoy that price ahead of any possible further listing abroad.
Saudi Aramco also made a point in its filings to highlight its profitability and low costs through newly released data once held as a state secret by the Al Saud royal family, euphemistically referred to by the company as its “current shareholder.”
However, economic worries, the trade war between China and the U.S. and increased crude oil production by the U.S. has depressed energy prices. A Sept. 14 attack on the heart of Saudi Aramco already spooked some investors, with one ratings company already downgrading the oil giant.
It’s hard to overstate the power of the oil firm, known formally as the Saudi Arabian Oil Co. It produces over 10 million barrels of crude oil a day, some 10% of global demand. The firm’s net income in 2018 was 111.1 billion US dollars, far beyond the combined net income of oil giants BP PLC, Chevron Corp., Exxon Mobil Corp., Royal Dutch Shell PLC and Total SA.
Saudi Arabia’s oil sits close to the surface in large pools, making it far cheaper to extract. Saudi Aramco also has proven liquid reserves of 226.8 billion barrels, the largest of any company in the world and “approximately five times larger” than those held by the five oil giants, according to the firm’s IPO documents.
That’s led to a clamoring from investors for Saudi Aramco stock since Prince Mohammed announced plans in 2016 for a two-phase IPO of 5% of the firm in the kingdom and abroad.
The prince hopes to raise some 100 billion US dollars from investors, which will be funneled into the kingdom’s PIF sovereign wealth fund for projects to boost employment and major development projects.
The planned IPO saw years of delays over valuation concerns and where to list it abroad.
Oil prices, once over 100 dollars a barrel, crashed in 2014 to under 30 dollars a barrel.
Benchmark Brent crude now trades around 60 dollars a barrel, pushed up by a production cut by OPEC countries like Saudi Arabia and those outside of the cartel like Russia.
Those cuts have limited Saudi production, in turn pushing up its estimated government budget deficit for next year to nearly 50 billion dollars.
“The initial expectation is that there will be interest from the international market, mainly because of the hype and the pricing on the whole story that has gone behind it,” Raja said.
“Of course that is subject to the pricing, which we still don’t have any element of clarity on, in terms of what is going to be the listed price to start with.”

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