Foreign investors drawn to Saudi Aramco IPO offer

Comments by Saudi Crown Prince Mohammed bin Salman bin Abdulaziz and the kingdom’s oil minister sparked speculation about the actuality and timing of the limited sale of state crown jewel Saudi Aramco.

The Saudi leaders may be emboldened to move forward on Saudi Aramco’s initial public offering (IPO) based on Riyadh’s perception that it is successfully weathering the political fallout from the October 2018 killing of Saudi journalist Jamal Khashoggi and on the tremendous investor response that the Saudi state oil and gas giant received from its first international bond issuance.

Investment banks are reportedly in discussions with Saudi Aramco to secure advisory roles for the IPO, while the head of one foreign bourse seemingly pressed the case for floating shares on his exchange in a recent visit to Jeddah. In their statements, Crown Prince Mohammed and Oil Minister Khalid al-Falih both made it clear that the IPO had never been put on hold, with the sale scheduled for 2020 or early 2021.

Since the plan to offer up to 5% of Saudi Aramco to domestic and international investors was broached three years ago, there has been industry scepticism about the IPO ever happening, given the state firm’s opaqueness in revealing financial and operational data, the crown prince’s inflated valuation of the company and the inability of Riyadh to lock in its choice of one or more foreign bourses to participate in the listing.

The killing of Khashoggi put Riyadh’s diplomatic and economic relations with global powers to the test while investor confidence in the kingdom and its economic reform programme, Saudi Vision 2030, has been somewhat shaken.

The crown prince’s warm reception by world leaders at the G20 summit and the Trump administration’s unwavering support for the Saudi heir to the throne may have helped Crown Prince Mohammed regain his political footing.

Saudi Aramco’s ability to raise $12 billion from orders of more than $100 billion through its first international bond issue in April demonstrates that foreign investors are willing to bet on the kingdom’s political and economic future.

The corporate bond offering was record-breaking in reflecting the highest demand ever for an emerging market bond. Investors took heart from financial data in Saudi Aramco’s bond prospectus proving the firm was the world’s most profitable company last year with a net income of $111.1 billion.

Proceeds from the bond will help fund Saudi Aramco’s $69.1 billion purchase of a 70% stake in Saudi petrochemical firm Saudi Basic Industries Corporation (SABIC) from the kingdom’s sovereign wealth fund, the Petroleum Investment Fund (PIF). The Saudi government said the deal, announced in March, would bolster Saudi Aramco’s downstream sector, enhancing its corporate value ahead of the IPO and that the limited public sale would be delayed due to the merger process.

The Saudi Aramco-SABIC acquisition would give a quick and sizeable cash injection into the PIF, the primary investment vehicle for Vision 2030. It also put into question whether the Saudi government would need to go ahead with the IPO at all.

The crown prince and other Saudi officials have said the Saudi Aramco IPO should generate as much as $100 billion in sales proceeds based on a corporate valuation of $2 trillion. Industry estimates suggest a valuation of $1.2 trillion-$1.5 trillion is more realistic.

In an interview June 16 with Asharq al-Awsat, Crown Prince Mohammed dismissed the notion of serious delays involved with aspects of Saudi Arabia’s economic overhaul plans, saying: “Vision 2030 and its programmes, like all strategic plans, have to be reviewed and updated according to circumstances that may arise during implementation, without compromising its foundation or objectives.”

He reiterated the government’s commitment to the Saudi Aramco IPO “but under the appropriate circumstances and in a timely manner.” He said the sale would take place in 2020 or the beginning of 2021 and “setting the location of the IPO now is premature.”

Falih, speaking July 2, claimed the Saudi Aramco IPO “was never fully suspended.” He said: “We have always been clear that the IPO will happen in the 2020-21 timeframe.”

Top-tier investment banks are reportedly in discussions with Saudi Aramco over advisory capacities for the IPO. Although JP Morgan, Morgan Stanley and HSBC had been picked to help support the public offering when it was first announced in 2016, it is unclear whether those institutions are talking to the Saudis about being reinstated as advisers.

At least one foreign financial entity has taken advantage of the new momentum associated with the IPO. David Schwimmer, CEO of the London Stock Exchange (LSE), accompanied British Finance Minister Philip Hammond on a July 6-7 visit to Jeddah, most likely to push for the LSE as the favoured foreign bourse for share flotation.

The Saudi government has repeatedly stated that Saudi Aramco shares will be listed on the domestic exchange, the Tadawul, and that one or more foreign bourses will also be involved. Leading contenders are the LSE, the New York Stock Exchange and the Hong Kong Stock Exchange.

Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.

This article was originally published in The Arab Weekly.