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Oil izz not well? : Saudi Aramco IPO

After years of tussle with the bankers, valuation of the company and investor demand, Saudi Crown Prince Mohammed bin Salman finally gave the go-ahead for the IPO of Aramco on 1st Nov 2019. The Saudi government has now conceded that Aramco probably isn’t worth the $2 trillion valuations that the Prince has long advocated. The company is seeking to raise $24 to $25.6 billion by selling a 1.5% stake at a valuation of $1.6 to $1.71 trillion, which puts it close to Alibaba’s $25 Billion deal (The world’s largest IPO so far)

Saudi oiling it no more?

Aramco is the most profitable company globally and also the backbone of the kingdom’s economic and social stability. Its IPO is a cornerstone of a reform program of Saudi Crown to wean the Saudi economy off its reliance on oil. The proceeds from the offering will be used to boost the firepower of the OPEC nation’s sovereign wealth fund which is diversifying its investments.

Desperation kicking in even after lowering the Ego to $1.7 Trillion?

Saudi Arabia has been pulling out all the stops to ensure the IPO is a success and valuation is justified to a sceptical audience. Kingdom’s richest families are pressed to pour in money and banks are asked to loosen the margin lending rules. To further woo investors, their major announcements were:

  • Aramco plans to pay $75 billion in dividends next year

  • Company will pay an income tax rate of 20% on its domestic downstream business starting next year, compared with current levies of 50% to 80%

  • Saudi retail investors will be eligible to receive one share for every 10 allotted shares if they continuously hold the shares for 180 days

Still Oil is not the future….

All over the world, solar and thermal energy is better placed as compared to the conventional oil-related sector. There is a structural change that is making alternative fuels more affordable and there is an increased focus on electric vehicles. At the same time, we are witnessing the strong global movement against climate change that’s targeted the world’s largest oil & gas companies.

Considering these factors, even though bankers are witnessing sufficient early demand and IPO is likely to be oversubscribed, the long term future of Oil & Gas companies like Aramco remains bleak.   

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