Trading is likely to begin in December of what could be the world’s biggest initial public offering. More than three years after Crown Prince Mohammed bin Salman first raised the idea — and just three weeks after a plan to launch the share sale was abruptly shelved — oil giant Saudi Aramco has announced its intention to list shares on the local stock exchange in Riyadh. The news came shortly after the kingdom’s Capital Market Authority approved the offering.
The number and percentage of Aramco shares to be sold will be determined at the end of the book-building period, according to the company’s announcement of its intention to list. Trading is likely to start in December.
Aramco, which pumps about 10 per cent of the world’s oil, generated the most profit of any corporation last year with net income of $111bn — more than Apple Inc., Google’s parent Alphabet Inc. and Exxon Mobil Corp. combined. The company was targeting a $2 trillion valuation — more than double that of Apple — but the kingdom is now ready to accept a valuation of $1.6 trillion to $1.8 trillion to ensure the IPO is a success, according to usually informed sources.
The sale is key to Prince Mohammed’s Vision 2030 plan to overhaul the Saudi economy and end the kingdom’s reliance on oil exports. The proceeds from the IPO will boost the firepower of the OPEC nation’s sovereign wealth fund, which already has investments in funds managed by Blackstone Group LP and SoftBank Group Corp. Grabbing a role in the deal has been one of the most hotly contested mandates for global banks. More than 20 have been mandated, with the top roles going to firms including Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co.
But the path to today’s announcement hasn’t been smooth. Prince Mohammed’s insistence the company is worth $2 trillion has been met with skepticism from the international investment community. The original plan to list Aramco in either New York or London has been dropped in favour of a Riyadh-only flotation.
The company has been tiptoeing toward the greater disclosure required of publicly traded firms. Aramco published annual financial statements for the first time in April, ahead of a $12bn bond sale. In August, the company hosted its first earnings call with analysts.
Aramco earned net income of $68bn and generated $244bn in revenue and income related to sales in the first nine months of the year, it said in the statement. It expects capital expenditure of $35bn to $40bn next year, rising to $40bn to $45bn in 2021.
Financial statements for the first six months of the year showed that Aramco’s revenue and profit was higher than any other company’s. It also gives almost all of it back to the government through a mixture of taxes, royalties and dividends. Of the oil producer’s $46.9bn profit, $46.4bn was paid out in dividends.
Aramco and the government agreed to amend royalties on oil and condensate effective Jan. 1, the company said in the statement. It will reduce the royalty to 15 per cent from 20 per cent when Brent prices are less than $70 a barrel, increase it to 45 per cent from 40 per cent on prices between $70 and $100 a barrel, and raise it to 80 per cent from 50 per cent on prices above $100.
In an apparent bid to make the stock more attractive, Aramco’s board confirmed plans to pay $75bn in dividends next year, in addition to any potential special dividends. The company has considered raising that to $80bn. At $1.8 trillion that would mean a yield of 4.4 per cent, a decent payout in a low-interest-rate world, but still lower than the 5 per cent Exxon investors currently get.
Investors who buy into the IPO have been guaranteed that the dividend won’t fall until after 2024, regardless of what happens to oil prices. Instead, Aramco will cut back on payouts to the government if it has to reduce the total dividend to less than $75bn.
Saudi retail investors will be eligible to receive one share for every 10 allotted shares if they continuously and uninterruptedly hold the shares for 180 days from the first date of trading and listing on the exchange, Aramco said in the statement.
This edited article first appeared in Gulf Business