Why the Aramco IPO Doesn't Impress Me... Yet

Trade on the Tadawul, the local Saudi Stock Exchange, began today for the largest initial public offering (IPO) in history.

Following the initial trading, Saudi Arabia has touted the IPO for mega state oil company Aramco as a success.

And at a glance, this assessment appears to be on target.

The first major success is this: It happened. For the first time, the Saudis have allowed private ownership of a state-run enterprise, although admittedly less than 2% of it.

Then there is the valuation. Selling 3 billion shares at 32 riyals ($8.53) each amounts to $25.6 billion. That makes this IPO the largest IPO in history, eclipsing even the float of Alibaba back in 2014, which was valued at $21.8 billion.

It also puts an overall value on Aramco of $1.7 trillion, making it, once again, the largest ever seen and close to the $2 trillion initially projected by Crown Prince Mohammad bin Salman prior to the first abortive attempt at an IPO over two years ago.

In addition, global interest may well increase the number of shares available from the placement. Currently, the number of shares amounts to only about 1.5% of the company. That could increase to about 2% if an option to sell additional shares is exercised. And there is some evidence that the outside interest is growing.

However, despite all this positive success, the downside of this IPO didn't take long to emerge...

What Happened After Trading Began

Once trading began, Aramco's stock popped as expected. In the short term, we're not likely going to witness any significant changes from that, absent any other attacks on Saudi oil installations or a divergence of Saudi and Russian interests in continuing the current OPEC+ production cuts after March.

However, global interest is not going to be a huge factor, given the requirement that primary and secondary trading occur on the less liquid Tadawul until depository receipts and certificates emerge, allowing access on other international bourses.

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My Saudi financial sources are expecting the certificate approach to become, at least in the early stages, the preferred approach in Europe.

While both depository receipts and depository certificates pass ownership on to individual retail investors, receipts also transfer common share voting rights. Certificates, on the other hand, retain the voting rights with a custodian, usually the bank providing access to the certificates. That allows Riyadh to forge non-transparent ways to maintain control over ostensibly public share ownership.

On the other hand, it may also be much ado about nothing, at least at this point. Absent additional secondary offerings, the state (read royal family) still controls at least 98% of Aramco.

But the transparency issue is an ongoing concern. In fact, it's the most immediate downside to the IPO.

No Company Details Since 1979... And None to Be Seen Now

Trading on the Tadawul does not provide anywhere near the information and openness of major exchanges like London, New York, Frankfurt, or even Singapore. Some are suspicious that much of the IPO share purchases were made by either wealthy Saudis supportive of the royal family, or shell holdings effectively used to funnel royal money.

High among the transparency concerns is the usage of the local stock exchange to avoid providing anything close to the Aramco reservoir and production data that would have been required from larger, more established, foreign exchanges. Therefore, billions in investment have been offered without any better grasp of the underlying Aramco condition.

In fact, detailed data has not been available since the Saudis took the company over back in 1979.

There is also a deeper reason for using the local stock exchange. It involves management of foreign equity positions acquired with proceeds from the IPO and subsequent expansion of the Saudi Public Investment Fund (PIF) into which the IPO revenues will be folded.

This aspect will have a decisive impact on expanding what an energy investment means moving forward and our ability to profit from it. Riyadh sweetened the pot significantly by promising a dividend payout of $75 billion each year through 2024.

But the overall return on investment remains dependent on the price of crude oil.

And that is perhaps the biggest concern of all.

This Could Mean a Drastic Change in Energy Investing

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The Saudis need an increasing valuation of the Aramco shares to provide leverage in secondary trade and an escalating share price for any subsequent secondary offers. All of this, in turn, has a direct impact on what Riyadh does with placement proceeds and the structure of PIF.

Ultimately, the effect of crude pricing has two principal consequences for the IPO. The first is on the overall valuation of Aramco (since its value is essentially determined not by market sales of its oil but by reserves still in the ground). Second, the shares already available, and any subsequently released in later offerings, are a proportional ownership in aggregate company revenues.

Either way, the IPO has a forward liquidity flow directly reflecting the underlying price of oil. Expect Saudi policy to continue a reduction in production by OPEC+.

From the Saudi perspective, the short-term reduction in export revenues is more than counterbalanced by an increase in Aramco valuation.

Such reasoning would have defied belief only a few years ago.

And yet... it happened. It's happening right now. What I can tell you right now is that in itself, as I mentioned above, is the biggest success of this IPO.

What remains to be seen is the long-term effect it will have on the energy climate as a whole. As I've mentioned in previous Oil & Energy Investor columns, energy investing could be about to change forever, depending on how Riyadh uses the IPO proceeds. On this, I am likely to receive early signals from my network on investment targets, so stay tuned for those.

I'm interested to hear your opinions and questions on this momentous day in energy history. Leave your comments and questions down below and I will address them at a later date.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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