Fiscal Flavours 5 – Saudi Arabia

Published: November 2019 (3 Min Read)

Saudi Arabia has recently announced that its state oil giant Aramco will list shares on the stock market in Riyadh (known as the Tadawul). The offering for the shares will begin on 17^th November and close on 4^th December.

Analysts’ valuations of the company have varied from $1.2 trillion to $2.3 trillion and the company will be seeking to list within a valuation range of $1.6 – 1.7 trillion. In comparison, Aramco’s closest U.S. rival, Exxon Mobil, has a market capitalisation of nearly $300 billion and Chevron is valued at about $229 billion. 1.5% of the company’s equity will be listed.

At the top end of the price range it would be the largest IPO ever, exceeding that of Chinese giant, Alibaba, which raised $25 billion in 2014. It will become the world’s largest listed company, overtaking Apple. Whatever the final valuation, Aramco earned net income of $111 billion in 2018 on revenue of $315 billion, profitability which is greater than that of Apple, Google and Exxon Mobil combined.

0.5% of its shares will be reserved for individual Saudi retail investors, and many of the Kingdom’s richest families are expected to support the issue, despite the crackdown against many of them in 2017.

The shares are not being marketed in the US and Canada nor in Japan, but it is hoped that funds from other parts of the Middle East, China and Russia will support the issue. In the West climate change and governance issues have caused concern about the valuation.

Global oil demand may peak within the next 20 years, according to an assessment from industry consultant IHS Markit which was included in the prospectus. Aramco is one of the lowest-cost producers and its market share may rise as demand slips, but the need to diversify is obvious.

Moreover, among the risks highlighted in the prospectus were the potential for terrorist attacks, such as the recent drone attack.

The listing of Aramco is a key step in Crown Prince Mohammed bin Salman’s plans to diversify the Saudi economy away from oil by investing in non-energy industries. The plans are encapsulated in “Vision 2030”. https://vision2030.gov.sa/en

This is a wide-ranging plan to re-orientate public investment in Saudi Arabia and includes ambitious plans for the transformation of the kingdom. It involves privatisations, strategic partnerships with foreign investors and the empowerment of its citizens. Goals include:

• Investment in renewable energy, tourism and the digital economy
• Increasing the share of GDP driven by small and medium-sized companies from 20% to 35%, and by the private sector from 40% to 65%
• Increasing the participation of women in the workforce and lowering the rate of unemployment
• Non-oil government revenue going from SAR 163bn to SAR 1trn ($270bn)
• Lifting household savings rates from 6% to 10%
• The non-profit sector’s contribution to the economy growing from 1% to 5%

Proceeds from the IPO will be transferred to the Public Investment Fund, which has been making a number of bold investments, including investing $45 billion into SoftBank Corp.’s Vision Fund, taking a $3.5 billion stake in Uber Technologies Inc. and planning a $500 billion futuristic city.

The initiatives will involve significant cultural change and the addressing of entrenched interests. Progress will not be simple.

Sources:

https://www.scmp.com/business/companies/article/3037083/saudi-aramco-ipo-start-november-17-what-could-be-worlds-largest?

https://www.cnbc.com/2019/11/09/saudi-aramco-ipo-prospectus-released.html

https://www.bloomberg.com/news/articles/2019-11-17/aramco-seeks-1-71-trillion-valuation-in-world-s-biggest-ipo

https://www.saudiaramco.com/-/media/images/investors/saudi-aramco-prospectus-en.pdf?la=en&hash=8DE2DCD689D6E383BB8F4C393033D8964C9F5585