The biggest IPO in history: Saudi Aramco

‘The most profitable company in the world’ has now become the most valuable firm in the world. After raising $25.6bn in the world’s biggest IPO for a 1.5% stake, Saudi Aramco – the biggest oil company in the world – is now valued at a whopping $1.7tn. Although this falls below the initial expectations of Crown Prince Mohammed Bin Salman, who wanted to value the country’s economic crown jewel at $2tn, Aramco still holds a value higher than the next 5 biggest oil companies combined.

In a time when investors’ appetite is changing with a global shift to cleaner energy, this IPO is a part of Prince Mohammed’s transformation plan for the Saudi Arabian economy that is currently dependent on exporting oil. With a surge in ‘millennial investors’ and awareness in the consequences of using non-renewable energy such as oil, there has been an increase in speculation over the Middle East, especially Saudi Arabia, and its dependence on oil. This IPO seems to be Saudi Arabia’s answer: to use funds like this to create new industries, including manufacturing, tourism, mining and to help enact social reform.

However, there have been many bumps on the road towards this IPO. An attack on August 17th at Aramco’s Shaybah NGL facility took it offline for almost two weeks. Almost a month later, further attacks on the vital Abqaiq and Khurais facilities reduced oil production by 54%. By the end of September, production had recovered but investor confidence had deteriorated. Further to this, there has been a lack of transparency concerning the governance of the company with Aramco operating under a concession agreement. On this deal, investors will have to put their trust in the government, which is fairly uncommon in today’s world. Overall, this is what led to Saudi Aramco selling just 1.5% instead of the 5% that was initially planned, and at a much lower valuation than that expected by Prince Mohammed.

My final paragraph will conclude whether buying shares in Saudi Aramco on 12 December, when trading starts, will be a worthwhile investment. The Kingdom has pledged a bumper annual $75bn dividend, changing tax and royalty rates and to curb long-term capital spending to help cash flows to increase the shares attractiveness. Recent IPOs however have either performed poorly or failed to take place: WeWork, Uber, Lyft and Guardion Health Sciences offer numerous examples of why investors should approach Aramco with scepticism. The trust required in the Saudi Arabian Government and ever-increasing uncertainty surrounding the politics of oil and non-renewable energy has led to a perpetuating deterioration in investor confidence. This is why I think the biggest IPO in history will not be the biggest success in the history of IPOs.

 

By Michael Stock

Sector Leader: Benjamin Lane

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