Sunday, December 8, 2019

Saudi Aramco IPO - Daily Briefing

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  • IPO

OPEC+ production cuts buoy oil prices ahead of Saudi Aramco’s market debut

The highly anticipated market debut of Saudi Aramco, the world’s biggest and most profitable company, is scheduled for Wednesday December 11, with last Friday’s production cut agreement by the OPEC+ alliance lending some support to the share price by lifting global oil prices.

Saudi Aramco priced its IPO last week at 32 riyals per share ($8.53) – on the top end of a pre-set range -- putting the firm on track to raise $25.6 billion in the largest IPO on record. The sale of a 1.5% stake values the company at $1.7 trillion.

The listing on Saudi Arabia’s Tadawul stock exchange was oversubscribed by nearly three times, but demand has been dominated by local investors, with foreign investors accounting for just over 10% of offers. Reports have suggested that regional sovereign wealth funds have invested in the 1.5% of the company on offer in this share offering, while global passive funds will enter as soon as Saudi Aramco is included in major emerging markets indices. Many international investors are likely to sit on the sidelines until a secondary listing in a major market.  

While some analysts have suggested that the $1.7 trillion valuation leaves something on the table for IPO investors – given it is short of the original $2 trillion mooted by the Saudi government – additional support may come from a rise in oil prices.

Following two days of meetings in Vienna, the so-called Opec+ alliance, which also includes Russia, agreed a production reduction of an extra 500,000 barrels a day in the first quarter of 2020, with Saudi Arabia pledging additional voluntary cuts of a further 400,000 b/d. Brent crude extended its gains to 5% over the week, but global oil prices are expected to remain range-bound in the coming weeks over expectations of a supply glut in the first half of next year.

The listing of Saudi Aramco raises an interesting dilemma for Saudi Arabia’s future oil price strategy. While the share price is likely to be highly correlated with global oil prices, Saudi Aramco’s profitability may be better served by increasing production. The company is the most efficient oil producer in the world, with by far the lowest production costs, and under a marginal royalty scheme, must make higher payments to the government when oil prices rise above US$70 a barrel, and significantly more at US$100 per barrel.