Why the world’s most profitable company is going public

Dhahran: Saudi Arabia’s giant state oil company finally kick-started its initial public offering (IPO) on Sunday, announcing its intention to float on the domestic bourse in what could be the world’s biggest listing as the kingdom seeks to diversify its economy away from oil. But in its long-awaited announcement, Aramco, the world’s most profitable company, offered few specifics on the number of shares to be sold, pricing or the date for a launch.

What is the valuation of Aramco?

Bankers have told the Saudi government that investors will likely value the company at around $1.5 trillion, somewhat below the $2 trillion valuation by Saudi Crown Prince Mohammad Bin Salman when he first floated the idea of an IPO nearly four years ago. Sources told Reuters the oil company could offer 1%-2% of its shares on the local bourse, raising up to $40 billion. A deal over $25 billion would top the record-breaking one of Chinese e-commerce giant Alibaba in 2014.

What happens now?

“Today is the right opportunity for new investors to reap the benefits of Aramco’s ability to achieve value, and boost it on the long-term,” Aramco Chairman Yasir Al Rumayyan told a news conference at the company’s headquarters in the eastern Saudi city of Dhahran. The company will spend the next 10 days talking to investors and sounding out their interest and the price range will follow, he said.

The IPO is designed to turbocharge Prince Mohammad’s ambitious economic reform agenda by raising billions to build non-energy industries and diversify revenue streams in Saudi Arabia.

What about security?

Confirmation of the sale of shares in the oil giant, whose formal name is Saudi Arabian Oil Co, comes about seven weeks after a crippling attacks on its oil facilities, underlining Saudi Arabia’s solid determination to push on with the listing regardless. Aramco said it does not expect the Sept. 14 attack, which targeted plants at the heart of Saudi Arabia’s oil industry and initially halved its production, would have a material impact on its business, operations and financial condition.

Why is Aramco so important in global oil markets?

Aramco accounted for about one in every eight barrels of crude oil produced globally from 2016 to 2018, it said on Sunday. Its net income for the third quarter of 2019 amounted to $21.1 billion, according to Reuters calculations, dwarfing the income for the same period of oil giants like Exxon Mobil Corp , which was just over $3 billion.

What steps has Aramco taken to strengthen the IPO?

Al Rumayyan said the company’s valuation should be determined after the investor roadshow. CEO Amin Nasser told the same news conference that Aramco plans to release the prospectus on November 9. To help get the deal done, Saudi Arabia is relying on easy credit for retail investors and hefty contributions from Saudi businessmen. The Saudi stock market fell 1.7% on Sunday after the Aramco announcement. The benchmark index is down nearly a fifth since May as local institutions sold shares to prepare for the Aramco deal, fund managers and analysts say.

Salah Shamma, head of investment, MENA, at Franklin Templeton Emerging Markets Equity, said some local investors could be selling other shares in order to shift investments to Aramco, but this could well be a case of “short-term pain for long-term gain.” To comfort investors, Aramco said on Sunday the state will forgo its right to receive a portion of cash dividends on shares, giving priority to new shareholders. Aramco is also cutting royalties it pays to the state.

What’s on offer for Saudi and non-Saudi investors?

Effective January 1, 2020, it will adopt a progressive royalty scheme, with a marginal rate set at 15% up to $70 per barrel, 45% between $70 and $100, and 80% if the price rises higher. The firm said the Saudi market regulator, which approved the application to list on Sunday, issued an exemption for non-resident institutional foreign investors to subscribe. Saudi investors would be eligible to receive bonus shares – a maximum of 100 bonus shares for every 10 allotted shares. At a valuation of $1.5 trillion, Aramco would still be worth at least 50% more than the world’s most valuable listed companies, Microsoft and Apple, which each have a market capitalisation of about $1 trillion.

Is this the right time to go public?

The promised listing has had Wall Street on tenterhooks since being announced in 2016. Aramco mandated 27 banks to work on the deal including Citigroup, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley. “I think this is the right time for us to take Aramco to be a public company… we wanna go IPO and we wanna go now,” Al Rumayyan said on Sunday when asked about the timing.