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Energy Giant Saudi Aramco Eyes $1.7tr Valuation In What Could Be The World's Biggest IPO Ever

Former Managing Director of Ahmedabad Stock Exchange
Nov 19, 2019 5:40 AM 4 min read

Saudi Arabia's state owned Saudi Aramco is responsible for around 10% of the world's total crude oil production. The company bankrolls the Saudi Government's finances.


  • Its initial public offering (IPO) was initiated way back in 2016
  • Crown Prince Mohammed Bin Salman (MbS) had then guided to a valuation of $2tr, equivalent to c. INR143L cr - roughly equal to the total market capitalisation of all listed Indian companies on BSE (c. INR152L cr)
  • Aramco's expected valuation was 4% of world's total market capitalisation of $56tr
  • At $2tr, Aramco's valuation would have been almost double of Apple Inc's market capitalisation of $1.18tr
  • India's state oil company ONGC's market capitalisation of INR1.74L cr would be less than 2% of Aramco's expected valuation of INR143L cr


Investment Banks such as JP Morgan Chase, HSBC, Morgan Stanley etc have been working on the proposed IPO for the last three years. The mega listing was initially proposed to be floated on all major exchanges i.e. New York Stock Exchange, London Stock Exchange, Hong Kong Stock Exchange etc with only a tiny portion to be reserved for Saudi Arabia's local exchange Tadawul. President Trump had then tweeted that he welcomes the offer of Aramco shares to American investors. UK's Financial Services Authority had eased the listing norms for state owned entities to facilitate listing of Aramco on London Stock Exchange.


But the IPO process slowed down, primarily due to the gap between the expected valuation by Saudi Government and the perceived valuation by the investors.


At the crude price of $60 a barrel, investors were projecting a valuation of about $1.5tr for Aramco, 25% lower than $2tr. With prices on an upswing, the Saudi government saw no valid reason to bring down its expected valuation. Moreover, buoyancy in crude oil prices also improved Saudi Arabia's revenues and the country was in no rush to collect the $100bn from the proposed listing at the expense of bringing down valuation.


Oil Giant Saudi Aramco Eyes c. $1.7tr Valuation In What Could Be The World's Biggest IPO Ever


As per current estimates, 81.89% of the world's proven oil reserves are located in OPEC Member Countries, and Saudi Arabia accounts for a lion's share of 21.9% of OPEC reserves. The economic pain in Venezuela and the sanctions on Iran, two other major members of OPEC, is a gain for Saudi Arabia. Venezuela's economic turmoil and sanctions on Iran are contributing to higher crude oil exports by Saudi Arabia, making the country's finances stronger.


Saudi Aramco earned a net profit of $111bn on a revenue of $315bn in 2018. To put these figures in perspective, Apple Inc posted its highest global revenue of $265bn and a net profit of $59bn in 2018.


Aside from valuation, Saudi Arabia also posed other concerns. NYSE has become a risky listing destination due to a post 9/11 legislation, which allows US citizens to sue Saudi citizens for the tragedy.


The original plan also suffered a setback after the assassination of Saudi government critic and journalist of The Washington Post Jamal Khashoggi in Saudi Arabia’s Istanbul consulate in 2018.


Foreign investors were also concerned about a shift away from consumption of fossil fuels in future due to climate change worries.


Saudi Aramco IPO has been now launched for this month with a revised valuation of between $1.6-$1.7tr, well below the $2tr government target.


Oil Giant Saudi Aramco Eyes $1.7tr Valuation In What Could Be The World's Biggest IPO Ever


The Aramco IPO will now rely heavily on local investors after receiving a tepid response from international money managers. The shares won’t be listed on the US stock exchanges and Canada as was originally planned. The shares also won't be offered in UK, Australia and Japan.


Only 1.5% of share capital would be listed on the the local stock exchange Tadawul in Saudi Arabia, to fetch a much smaller amount than the originally planned $100bn. At the lower end of the price band, the offer would fall short of a world record for an IPO, may be just below the $25bn IPO of Alibaba Group launched in 2014.


To ensure that the IPO of Aramco is a success, Saudi Arabia cut the tax rate for Aramco three times and promised the world’s largest dividend pay-out. Bonus shares to retail investors were also promised. Aramco has promised a dividend of at least $75bn next year, which will reward the prospective investors with a dividend yield of between 4.4% and 4.7%. IPO price band has been set at 30 Riyals ($8) to 32 Riyals per share. Aramco will publish the final subscribed price and valuation on December 5.


Putting aside all concerns and controversies, Aramco IPO is likely to create a publicly traded company of unmatched valuation and profits.


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