On December 11, 2019, Beijing time, Saudi Aramco (hereinafter referred to as Saudi Aramco) was listed on the Riyadh Stock Exchange, Saudi Arabia, under the stock code 2222. It is worth mentioning that the first day of Saudi Aramco listing immediately rose and stopped, according to the latest trading price, Saudi Aramco’s market value reached 1.88 trillion U.S. dollars, equivalent to 13.16 trillion yuan, the market value of a day jumped 1.2 trillion.
Original title: one day soared 1.2 trillion yuan, the market value of Microsoft Apple, the world’s largest IPO was born Source: CIC
As a result, Saudi Aramco’s total market capitalisation has overtaken Microsoft and Apple as the world’s largest company by market capitalisation.
On December 5, 2019, Saudi Aramco set a share offering price of 32 Saudi riyals ($8.53) for $25.6 billion, surpassing Alibaba’s 2014 IPO record of $25 billion and becoming the “world’s largest IPO.”
The birth of the world’s most valuable company
According to public information, Saudi Aramco was formed in 1933 by a joint venture between Saudi Arabia and the California Standard (now “Chevron”). During the 1973 “oil crisis”, Saudi Arabia began to nationalize it and finally completed it in 1980.
“The world’s most profitable company” is not a false name.
According to the prospectus, Saudi Aramco’s 2018 revenue was $388 billion and its annual net profit was $111.1 billion, or about 781 billion yuan, about 15 times that of PetroChina.
It is worth noting that Saudi Aramco’s return on net assets (ROE) far exceeds that of competing companies, with net profit swelling the combined of five established multinational oil giants Exxon Mobil, Shell, BP, Total and Chevron.
Saudi Aramco vs. Competition ROE (Photo: Morningstar Stock Research Report)
“Saudi Aramco has its own oil and gas reservoir, which is one of the lowest in the world for oil and gas production, with an overwhelming cost advantage. Allen, an energy industry analyst at Morningstar, believes this advantage will give Saudi Aramco a broad economic moat.
Not only that, but no other company can match Saudi Aramco in terms of size, structure and cost advantage. Based on the company’s average production of 13.6 million barrels per day in 2018, 10.3 million barrels of crude oil is considered, according to the prospectus. At the same time, its crude oil reserves are sufficient for 52 years.
“That’s enough to dwarf the rest of the oil and gas companies. Allen, an energy industry analyst at Morningstar, commented.
Saudi Aramco vs. Year of oil reserves (Photo: Morningstar Stock Research Report)
However, the bottleneck of “the world’s largest oil giant” has reached.
On December 7, 2019, at the OPEC meeting, OPEC and its allies agreed to increase production by 500,000 bpd in the final three months of the current production cut agreement, with Saudi Arabia to shoulder an additional 160,000 bpd of production cuts, in addition to announcing a voluntary 40 bpd cut in the agreed quota.
That means Saudi Arabia’s total production cuts have fallen to 2.1million barrels a day under the latest production cut, the lowest level since 2014.
Thus, Saudi Aramco at this time choose to list, it is helpless.
Saudi Arabia “selling sons for survival” but in a twist and turn
“The Saudi Aramco IPO is both a desperate act under energy pressure and a significant step in the kingdom’s strategy to ‘modernize’. The New York Times analysis said.
According to Haitong Securities, 60-95% of Saudi government revenues since 2009 have come from the oil industry. In 2018, the Saudi government generated $238.6 billion in revenue, 68 percent of which came from the oil industry, while in the same year, Saudi exports of goods amounted to $294.4 billion, of which crude oil and petroleum products accounted for 79 percent.
Saudi Arabia, which has used oil as its main source of income, has suffered financial difficulties since the collapse in oil prices in 2014.
According to the 2019 budget announced by Saudi Arabia, its annual budget deficit is expected to be 131 billion riyals (the Saudi currency, or about 3.75 riyals per dollar), which would be the sixth consecutive year that the kingdom has run a fiscal deficit.
“Toho” Saudi Arabia did not sit back and die.
In 2016, Saudi Crown Prince Mohammed bin Salman proposed a plan called Vision 2030 to reduce the kingdom’s economy’s dependence on oil.
The listing of Saudi Aramco is a crucial part of Vision 2030. Over the past three years, however, the IPO process has not been smooth.
First, since 2017, global oil prices have plummeted from a triple-digit to $20 a barrel, and now, while they have rebounded, they are far from comparable.
Second, from 2018 onwards, the Saudi royal family has been constantly spreading out all kinds of right and wrong. In October 2018, Jamal Khashoggi, a prominent Saudi journalist living in the United States, was killed at the Saudi consulate in Istanbul, Turkey, sparking widespread international attention and widespread discontent, leading directly to the cold spot of the “Desert Davos” global chamber of commerce, which is known as the hopes of the Saudi crown prince.
Again, Saudi Aramco has been clinging to a $2 trillion target valuation. However, the company’s IPO has been called off several times because of delays in meeting that goal. At the time, IG Group analyst Beecham said: “With high oil supplies and uncertain demand, $2 trillion may have overestimated the company’s value.” “
Three years later, the Saudi royal family finally made a compromise on valuation. After the psychological expectations are adjusted, Saudi Aramco is officially preparing for the shock IPO from August 2019. That month, the company carried out a series of personnel appointments and dismissals.
In September 2019, Saudi Aramco’s IPO was put on the agenda, but it was delayed by an attack on the company’s oil production facilities, which temporarily shut down half of the company’s oil production.
The IPO process, which was supposed to start on October 20, 2019, was halted at the last minute by management because the company needed to provide investors with more material, including Saudi Aramco’s third-quarter financial data.
On December 11, 2019, Saudi Aramco was finally listed on the local stock exchange.
However, it is worth noting that, in addition to the original estimate of “2 trillion”, Saudi Aramco has not achieved the vision of “listing on one or more international stock exchanges in New York, London, Hong Kong and so on”.
As a result of the local IPO in Saudi Arabia, “Saudi Arabia’s sovereign wealth fund will have less cash for the non-oil sector.” The New York Times reported.
“Hopefully it will use the money to create jobs and help make the economy dependent on oil.” “The locality of the listing also means that it is shifting cash from Saudi individual and institutional investors to the Public Investment Fund, which may invest in promoting private sector growth in Saudi Arabia anyway,” the New York Times quoted people familiar with the matter as saying. “
International investors don’t buy it?
Saudi Aramco’s domestic initial public offering has attracted individual Saudi investors.
The New York Times reported that 0.5 per cent of Saudi Aramco’s first 1.5 per cent of the shares listed would be for ordinary Saudis, regardless of men and women, and that anyone would be eligible to subscribe.
Enthusiasm is high.
Currently, about 5 million individual investors bid for shares, or about 15 per cent of Saudi Arabia’s 34 million people. This has achieved one of the government’s main objectives of transferring ownership of Aramco to citizens.
Prince Abdul Aziz, who was appointed energy minister in September 2018, said many pension funds, banks, sovereign wealth funds and endowments had subscribed for Saudi Aramco’s shares. “One would certainly make the simple judgment that Saudi Aramco’s shares have long-term investment value. “
Zachary Sefarati, chief executive of Dalma Capital, which has bought Saudi Aramco shares with three funds, is even more optimistic. “In the first few days of the formal deal, Saudi Aramco’s market value could exceed $2 trillion,” he said. “
International investors don’t buy it.
International demand, which includes wealth funds from allies Kuwait and the United Arab Emirates, accounts for only about 10 per cent of subscriptions, the New York Times reported, citing people familiar with the matter.
“International institutions are primarily concerned about the shift to green energy in the current world energy landscape, while Saudi Aramco remains focused on fossil fuels, and the lack of transparency in Saudi Arabia’s geopolitical risks and companies. Reuters said in an analysis. “The prolonged geopolitical conflict in the Middle East and the rise of U.S. oil have hurt Saudi Aramco’s valuation. “
However, if the saudi shimmering plan is largely dependent on Saudi own funds, Saudi Aramco will eventually become a hot potato for the kingdom.
“On the one hand, Saudi Aramco’s huge volume will make Saudi institutional investors less resilient to risk, and on the other hand, Saudi retail investors investing in Saudi Aramco will be more vulnerable to the fall in Saudi Aramco’s share price.” The New York Times said.
As a result, Alan Wald, president of Transversal Consulting, a consultancy, expects “a fairly low volume of shares in Saudi Aramco this week.” “
“Because everyone interested in buying, especially retail investors, buys at the IPO, ” he explains. The Saudi government is doing a lot of work to ensure there are enough incentives to encourage people not to sell shares for the first six months after going public. “
Meanwhile, in response to rumours that Saudi Aramco will list in China or Japan in 2020, Alan Wald commented that an international IPO is unlikely in the near future after the company’s domestic listing.
“On any other country’s stock exchange, Saudi Aramco has to give up some control. They will face potential lawsuits from shareholders, something the Saudi government is really going to handle. Alan Ward said.