Why Aramco IPO Won’t Happen Until 2019–at the Earliest

A $1.5 Trillion Aramco IPO Could Transform Global Stocks

April 22, 2018 (Irshad Salim): The debate over which international stock exchange should be the venue for listing Saudi Aramco–the world’s most valuable company, has yet to be resolved while the timing of the initial public offering (IPO) appears to have been somewhat narrowed down.

The oil giant’s IPO–currently slated for the second half of 2018—could be pushed into 2019, Saudi Energy Minister Khalid Al-Falih hinted in an interview with Bloomberg published last month—the first such hint from a high-ranking Saudi official that the highly anticipated listing of Aramco may not see the light of day this year as promised.

Al Falih has suggested the litigation risks that come with New York would be prohibitive, so London and Hong Kong are now favorites – although the financial disclosures will not be easy – or even comfortable – for Aramco to navigate.

There are also doubts as to investor appetite, with the $1.5-$2.0 trillion estimate seen as ambitious.

Post-IPO, the oil giant’s market value would then be almost twice that of Apple, four times bigger than Exxon Mobil Co. and at least one-fifth of the $5.8 trillion MSCI Emerging Markets Index, the benchmark for emerging markets, according to data compiled by Bloomberg.

At the same time, Saudi Arabia plans to create the largest sovereign wealth fund and sell hundreds of state assets, including stakes in the stock exchange, football clubs and flour mills.

“Saudi Arabia would raise $75 billion with a sale of 5 percent in Aramco with the IPO, assuming a $1.5 trillion valuation, which is earmarked to be used to implement planned reforms and ease the economy’s reliance on oil,“ said Salih Yilmaz, an analyst at Bloomberg Intelligence in January in London. “This is vital for the kingdom especially amid concerns of declining oil demand in the long term. For the global oil markets, the IPO may provide more transparency, given an independent audit of proven reserves would likely be required.”

Saudi Arabia is now awaiting the decision – due in June – as to whether MSCI will grant the Tadawul exchange emerging market status. If it does, the new classification would be in two steps, in the months of May (possibly June), and August of 2019.

Some experts have suggested that the new status (MSCI) might be a reason to push against an international listing in light of the capital inflows – which could be as much as $68 billion – that the exchange would then attract.

Part of the Kingdom’s reform agenda (Saudi Vision 2030) has been capital investment in diversification projects, particularly in areas such as manufacturing, energy, tourism and technology. With oil prices rebounding to close to $70 a barrel and money still freely available on the bond market, the urgency of an Aramco IPO in the next 12 months seems to be receding.

The Saudi government has recently listed more than $53.3 billion in 45 bonds and sukuks on the local market.

Meanwhile, the burning question in the oil industry is when will Saudi Arabia pull the trigger on the Aramco stock market listing?

“Between December 31st and January 1st there is no value lost for the kingdom,” al-Falih told Bloomberg. “So, I don’t see this artificial deadline that you refer to as being significant,” Opec’s most influential minister said.

“The only certain thing about the Saudi Aramco IPO is that a) it will happen, b) the anchor market will be the Tadawul exchange in Saudi Arabia,” al-Falih told Bloomberg.

Industry experts are focusing on the current level of oil prices to be the trigger point for Aramco’s evaluation and the oil giant’s listing– it would determine the evaluation of Aramco a bit below or close to the $2 trillion that Saudi officials appear to want, according to Arabian Business.

Reuters citing sources report that the Riyadh government is carefully analyzing the future price curve structure in oil markets because it regards prices further out as an important element in achieving a high valuation in what could be the biggest initial public offering in history.

Ideally, so-called long-dated prices for one and two years ahead need to move at least $10 higher – for the government to be happy to launch the listing, said the sources, who declined to be named as the information is confidential.

“When will the ideal moment come?” said one of the sources. “Maybe you should also look at the forward curve for oil … as the forward curve will be key for investors valuing Aramco.”

According to several analysts, the kingdom has orchestrated a global oil output cut deal to support prices, a move which Reuters has previously reported was partly driven by a desire to maximize Aramco’s valuation for the IPO.

“Indications that Saudi Arabia reportedly would like to see oil at $80 make sense in the context of the planned IPO,” Bloomberg’s Liam Dinning writes.

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