Saudi Aramco’s mega IPO: Why analysts remain cautious about it

Saudi Aramco is all set to list on the Saudi Stock Exchange in Riyadh, in what could be the world's biggest initial public offering (IPO). The state-owned oil giant, thought to be worth about $1.2-1.7 trillion, will determine the IPO launch price after registering interest from investors.

The company plans to release the IPO prospectus on November 9, according to its Chief Executive Amin Nasser.

The IPO has been much talked about and delayed many times since it was first spoken about in 2016. The company is expected to offer 1-2 percent stake, raising as much as $20-40 billion.

Many specifics of the public issue like date are still awaited, even as market believes it would be sometime in December. The firm has no immediate plans for a foreign share listing, which has been talked about as the stage-2 of the IPO listing. It will be listed on the Saudi Stock Exchange, the Tadawul.

Valuations have been the main reason for the delay in the IPO. While

Saudi Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud has hinted at a valuation of $2 trillion, the markets have put the number between $1.2 and $1.7 trillion.

The crude oil price volatility has been another issue. The oil prices in the last 2 years have been sliding, making the scenario difficult.

Global slowdown impact was seen as a scenario not apt for the IPO.

1. Saudi Aramco is the world’s most profitable company with $111 billion for all of 2018.

2. It has second biggest proven oil reserves at more than 270 billion barrels with an estimated life of 52 years.

3. It has the largest daily production after the US shale output. It manages over 100 oil and gas fields in Saudi Arabia.

4. Around one-third of Aramco crude exports, at 5.2 million bpd were to Asia in 2018.

4. Major buyers of Aramco crude are China, India, South Korea, Japan, and Taiwan. It exports to North America and Europe too.

5. Aramco is the world’s largest oil producer, contributing 10 percent of global supply.

6. Saudi Aramco operates the world’s largest onshore oil field – Ghawar Field and offshore oilfield Safaniya Field.

7. In April 2019, Aramco raised $12 billion of bonds, its first international bond issue, breaking previous records for an emerging market entity.

8. The Kingdom is opening up to the media – domestic and international -- in the recent months.

9. Profit of $46.9bln in H1 2019, most of it paid out in dividends to Saudi state.

10. Cost of production at $4-$10 a barrel in Saudi Arabia is cheap as the oil is closer to the surface unlike shale production.

11. Aramco has assets in countries like the US, South Korea, China, Indonesia, Japan and Europe.

12. Aramco has Joint ventures in various countries in fields of refining and petrochemicals, including India and China.

13. It aims to triple chemical production to 34 million tonnes per year by 2030 and raise global refining capacity from 5 million bpd to 8-10 million.

14. It has country offices in cities such as Beijing, New Delhi, Singapore, New York, London and Houston.

1. The high volatility in the crude oil prices. The weak crude oil prices cut the H1 2019 profit by 12 percent to $46.9 billion.

2. Uncertain crude oil demand given the economic slowdown concerns globally.

3. Much of the proceeds from the offering not likely to flow to Aramco operations but to the Public Investment Fund, a Sovereign Investment Fund, which is investing in renewable energy and real estate projects.

4. Political tensions between Saudi Arabia and its neighbours. The recent drone attack on its oil facilities continues to worry investors.

5. The increasing market for the electric vehicles.

6. Limited control in the output policy due to being part of the Opec, which currently has an ongoing agreement with allies for a 1.2 million bpd cut until March 2020.

But while there are negatives, the markets do seem excited about the IPO and the markets outside of Tadawul are also watching the developments and response and awaiting their turn to own a piece of the much-awaited offering.