1. News
July 28, 2017

Saudi Aramco: what we know so far about the world’s biggest IPO

It looks like London is going to be the location for Saudi Aramco’s initial public offering (IPO).

Sources close to the matter told Reuters that advisers at Saudi Arabia’s national oil company have recommended London be the location for what is likely to be the world’s biggest ever IPO.

Earlier this year,  UK prime minister Theresa May and chairman of the London Stock Exchange (LSE) Xavier Rolet, met with Saudi’s oil minister Khalid al-alih during a visit to the Gulf state to try to persuade him to carry out the IPO in London.

This is because the scale of flotation is so large that it would be unable to list solely in Saudi Arabia’s exchange, Riyadh’s Tadawul — the size of the company would dwarf the rest of the stock market.

Riyadh will certainly be a location for the listing, however, Saudi Arabia has also been looking at London, New York, and Tokyo.

London has been making changes to accept the listing

As a result of the scale of the plan, which will only see five percent of the company listed, LSE  has been working on a new type of listing structure to encourage Aramco to list in the capital city.

According to a report by Reuters,  the new model that would allow Aramco to still have a “premium listing”, which usually requires companies to list at least 25 percent of their shares at a free float unless the Financial Conduct Authority (FCA) makes an exception.

However, in order to make the multi-billion deal possible, the FCA has approved a plan to create a new listing category for companies controlled by sovereign states.

Aramco is reportedly pleased with the plans and said it shows that London will remain a good place to do business, once the UK leaves the European Union in 2019.

Other state-controlled firms in Gulf countries including Oman and Abu Dhabi are considering listing their oil assets, and the new FCA changes will make London more attractive.

How much is Saudi Aramco worth?

Saudi Arabia has said it believes the company is worth around $2trn, meaning a five percent listing could see between $50bn and $100bn worth of shares offered to investors.

However, according to estimates by the Financial Times, it is thought the correct valuation should be no more than $1.1trn.

In order to boost the value of the company, there have been “significant changes behind the scenes” to prepare for the listing according to Matthew Jurecky, head of oil and gas research at GlobalData.

In May, Saudi officials lowered Aramco’s tax rate from 85 percent to 50 percent, to allow the company, and its future investors, to keep a bigger share of the profits.

In terms of valuation, the core value of the company comes from its upstream assets.

“A reasonable value for these assets currently lies somewhere between $600bn and $1.06trn,” Jurecky told Verdict.

There is a downside to this, however, as it assumes a flat oil price of $50 per barrel and that sustained lower oil prices are plausible.”

It is thought that the long range between the valuation figures depends on how long Saudi Aramco is able to produce at that rate it is currently producing.

“The company has stated it has remaining reserves in excess of 250bn barrels, which could see them producing at the current rate for the next 50 years, which in turn results in the $1.06trn valuation,” said Jurecky.

However, the valuation could be at $600bn, far lower than the $2trn Saudi Arabia expects because it is thought production will enter into a mild decline in the middle of the next decade.

“Saudi Arabia will try to maximise the capital raised from the IPO, however, if the shares are listed too high, they will see a share drop in price when trading begins.”

The location for the IPO is still very much under consideration and Jurecky believes we could see Saudi Aramco try multiple listings over the next few years, meaning London could still get a slice of the action.

“I would expect the firm to seek secondary listings over the next decade across multiple exchanges, so if the LSE is not selected as the first exchange, there could be a secondary listing in the future in London.”

The decision for the location should be towards the end of this year, at a conference organised by Saudi Arabia’s Public Investment Fund (PIF) in October in Riyadh.

“If we see filing for the listing in the fourth quarter of this year, it could place the public offering in the first quarter of 2018,” said Jurecky.