Investors all fuelled-up for Saudi Aramco's mega IPO
Saudi energy giant may achieve $1.8T valuation, help attract $10B inflows into market
The stage is set for Sunday's mega initial public offering (IPO) when retail and institutional investors will line up to submit their bids to own shares in the world's most profitable company, Saudi Aramco.
As current oil prices are hovering around $63 a barrel, the world's largest energy firm in terms of annual profit is expected to achieve a $1.8 trillion valuation.
However, it may cross the $2 trillion mark in case average crude prices pip $67 during the institutional book building that will take place between November 17 and December 4.
The IPO, which will open up ownership of the government-owned oil giant to public investors for the first time, is also expected to attract more than $10 billion inflows into the Saudi market, according to market experts.
"In our base case, we assume a $1.8 trillion valuation and a 2 per cent stake floated - this will translate into total passive inflows of $4.5 billion from MSCI Emerging Market Index trackers only, excluding other indexes trackers and active investors," Zachary Cefaratti, chief executive of Dalma Capital, said in a research note ahead of the IPO.
"Including other index trackers and active investors, the total inflows are expected to exceed $10 billion, a significant amount of incremental buying that should result in a strong market performance."
Aramco will start the share sale on Sunday, which will close on November 28 and December 4 for individual and international investors, respectively. The price range will be announced on Sunday as well, and the offer size and price will be decided on December 5, according to the IPO prospectus.
The Saudi energy giant is expected to offer 1 per cent to 2 per cent of its shares, raising as much as $20 billion to $40 billion, market insiders said. In a best-case scenario, the company can raise a maximum $60 billion if its valuation hit $2 trillion and 3 per cent shares are offered to investors.
Dalma Capital, one of the largest Saudi equity fund managers, said the individual tranche size will be up to 5 per cent of the company. "We are assuming that if 2 per cent of Aramco shares is floated on the Tadawul, then individuals will be allocated up to 25 per cent of offered shares with the balance allocated to institutions," said Cefaratti.
Aramco is expected to have a weight of around 13.5 per cent in the local market index, assuming a $1.8 trillion valuation and a 2 per cent float - indicating a sizeable weight in the main index used as a benchmark by most local institutions. However, it may have an 18 per cent weightage in the main index in case the company's valuation hit $2 trillion mark and 3 per cent shares offered to investors.
Market experts said selling pressure across regional markets due to the Aramco IPO may drive the the Tasi to attractive entry levels for active emerging market funds to the tune of up to $10 billion.
Khalid Al Hussan, chief executive of the Tadawul, said the exchange and all its systems are ready to receive the largest listing in the history of financial markets.
"The listing of Saudi Aramco's shares is a major event for Tadawul and a significant milestone towards the realisation of Vision 2030. We will make every effort, alongside our partners in the Saudi Capital Market, to ensure this listing is a success and secures Tadawul's position as a leading international stock exchange," Al Hussan said.
The IPO could be the world's largest, and if it achieves a valuation of $1.8 trillion, Saudi Aramco would far exceed the market capitalisation of giants like Apple, Microsoft and Amazon.
"You need to have really robust technology in order to support the spike that's expected with a high-profile IPO," Spencer Mindlin, an analyst at Aite Group, told Reuters. "For an exchange in an emerging market like Saudi Arabia, the Aramco IPO arguably carries more risk than for an exchange in a country with a more developed capital markets infrastructure, because the IPO will set the tone for the market," he added.
Aramco reserves stood at 256.9 billion barrels of oil equivalent at the end of last year - sufficient for 52 years, much longer than the five major international oil companies who claim between nine and 17 years. In 2018, Aramco produced 13.6 million bpd of oil equivalent including 10.3 million bpd of crude. Its total liquids production of 11.6 million bpd was over 20 percent higher than the combined output of the five major international oil companies, among them BP and Shell.
"Aramco is the world's most profitable company with 2018 earnings of $111 billion. It produces one in every eight barrels of oil produced globally and the company is guaranteeing a minimum annual dividend of $75 billion," according to Dalma Capital.
Meanwhile, Saudi Aramco's forthcoming listing on the local stock market could help strengthen the government's net asset position, with the proceeds potentially raising the kingdom's longer-term economic growth, S&P Global Ratings said in a Reuters report.
"The bulk of the funds raised will go to the government or the Public Investment Fund, potentially adding to the sovereign's already strong fiscal net asset position of 72.7 per cent of GDP," S&P said in a note.
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