Investment banks, stock exchange heads, and investors – professional and passive – are salivating at the idea of parking their money in one of the world’s largest companies: Saudi Aramco. But will the prospect of handsome dividends and vast long-term returns outweigh the international community’s concern over corruption, terrorism, and reprehensible human rights violations? The world will see in a month.
A Royal Affair
Saudi Aramco, the Saudi Arabian-owned oil titan, formally launched a landmark initial public offering (IPO) that will see the energy juggernaut start trading on the nation’s Tadawul stock exchange in December. The prospectus is scheduled for release on Nov. 9, but analysts are trying to get ahead of the official information, especially as the government remains quiet on the details.
While it is unclear how much of Aramco is willing to be sold or how much money the company can raise, experts say that it could be as much as 2% of the shares. This would raise as much as $40 billion, the largest flotation in history.
“Our mission is to provide our shareholders with long-term value creation through crude oil price cycles by maintaining our pre-eminence in oil and gas production,” Aramco CEO Amin Nasser said in a statement.
The biggest question mark in global financial markets is its valuation. The nine Wall Street institutions working on the IPO are using the cost for a barrel of crude – $64.50 in 2019 and $60 from 2020 to 2023 – to come up with a figure. So far, the range varies between $1.3 trillion and $2.3 trillion. The price target is also uncertain, but Aramco plans to declare aggregate ordinary cash dividends of $75 billion for 2020.
What we do know is that it possesses 263 billion barrels of oil reserves and 320 trillion cubic feet of natural gas. With its low debt levels, Aramco is the largest cash holder of all non-financial firms in Africa, Europe, and the Middle East. Its capital expenditures for next year are projected to top $35 billion.
This is a major deal in the marketplace for a few reasons.
Aramco has tried to file an IPO several times for the last three years, but there were delays every time. The biggest cause for the postponements was the extreme fluctuations in crude prices, which made it hard to accurately value Aramco. Also, a couple of the state-owned company’s oil facilities were attacked, which temporarily impacted Aramco output and global prices.
Another factor that has come to light only recently is its profit levels. Aramco is currently the world’s most profitable company, generating $111 billion in net income in 2018 and totaling that of Apple, Alphabet, and Samsung combined. However, its nine-month profit declined 18% as the oil giant earned a net income of $68.2 billion, down from $83.1 billion from the same time a year ago. This is interesting since it continues the trend of IPO companies losing money leading up to their market debut. Though Aramco is still earning tremendous profits, the latest slide should trigger some consternation among investors.
Shadow of a Doubt
This is a no-brainer, right? Who would not want a stake in the world’s most profitable company? Even if you think peak oil is right around the corner, Aramco is diversifying investments in natural gas and renewables, so this is another point in its favor. It seems like an obvious buy until you realize the owner: the Saudi kingdom.
The government, which has implemented a series of quasi-reforms in the era of Prince Mohammad bin Salman, has come under intense scrutiny and heavy rebuke in the international community for everything from the killing of a journalist to unlawful detentions of regime critics. Human Rights Watch (HRW) has published a 62-page report highlighting Muslim scholars, women’s rights activists, and dissidents who have been subjected to travel bans, harassment, detainment, and torture.
In a case related to the stock, economist Essam al-Zamil was believed to have been targeted by authorities over his skepticism of the IPO. The human rights watchdog said that Zamil “had called into question Saudi projections of revenue from the Aramco initial public offering.” He is currently on trial for his alleged membership in the Muslim Brotherhood.
Michael Page, deputy Middle East director at HRW, said in a statement:
“Mohammed bin Salman has created an entertainment sector and allowed women to travel and drive, but Saudi authorities have also locked away many of the country's leading reformist thinkers and activists on his watch, some of whom called for these very changes.
“A truly reforming Saudi Arabia would not subject its leading activists to harassment, detention, and mistreatment.”
For years, many businesses and investors have ignored what has happened in Riyadh. It is reminiscent of the situation in China. So will investors park their moral indignation at the door? Or will traders refuse to turn a blind eye to alleged human rights abuses and satisfy their equity needs somewhere else? We shall learn of the foreign interest next month.
There Will Be Blood
The global IPO market has been a roller coaster ride for all of 2019. What better way to finish off the year than with an energy goliath going public? Even if this is a move out of desperation for Saudi Arabia and Aramco, it is a historic event that will generate headlines across the globe. Following the IPO, Aramco will still be in the news because a lot of blood will be shed – figuratively and perhaps literally – when the next bear market imbibes crude and the world slips into a recession. Grab the Texas Tea!
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