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Mon 4 Nov 2019 11:43 AM

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Saudi Aramco IPO in Riyadh a 'bridge' to eventual international listing

Analysts also believe that the market may need to find a new 'anchor dynamic' in the wake of the Saudi Aramco IPO

Saudi Aramco IPO in Riyadh a 'bridge' to eventual international listing

Emirates NBD commodity analyst Edward Bell said that the bank expects “oil markets to fixate on Aramco news over the coming weeks”.

Saudi Aramco’s domestic IPO may still serve as a bridge towards an international listing despite the company saying that it has no plans to do so, according to Salah Shamma, the head of MENA investment at Franklin Templeton Emerging Markets.

Following the announcement on Sunday, Aramco said it had no plans for an international listing, suggesting that the long-suggested aim of a second offering on a foreign bourse had been shelved. The company had initially been expected to sell 2 percent on the Saudi bourse and 3 percent overseas.

Shamma told Arabian Business that Franklin Templeton believes the IPO could still serve as a “bridge” towards an international listing and hopes that it will happen at a later date.

“As an international investor, we want to see a successful local IPO of Saudi Aramco,” Shamma said. “Saudi Aramco’s $12 billion bond issue earlier this year was one of the most oversubscribed in history and allowed it to borrow at a lower yield than its sovereign parent. This demand bodes well for its IPO.”

According to Shamma, the Aramco IPO “could offer investors exposure to a truly unique asset” with more than 257 billion barrels and producing more than 13.5 million barrels per day of oil equivalent.

“We believe the company is in a class of its own when it comes to profitability and cash flow generation,” Shamma said. “The recent attack on the company’s facilities does not put into question the strength of the company’s fundamentals, but it should elevate its risk premium, at least for international investors.”

Pricing and market outlook

Although analysts have estimated that that they expect the Saudis to settle on a valuation of $1.6 to $1.7 trillion, Shamma said that even if the valuation comes in at approximately $1.5 trillion, “it will still be the most valuable company in the world”.

“And with $111.1 billion of profit in 2018, it also ranks as the most profitable company,” he added.

In a written analysis of the Aramco IPO, Emirates NBD commodity analyst Edward Bell said that the bank expects “oil markets to fixate on Aramco news over the coming weeks”.

“[This includes] the publication of the company’s prospectus which may shed more light on production costs and outlook, dividend strategies and how the company plans to adapt in a world on the verge of a substantial energy transition away from oil and gas,” Bell added.

Saudi Aramco has already announced some changes in royalty schemes, lowering the rate to 15 percent from 20 percent on Brent prices below $70 per barrel, but raising it on higher price levels, such as 45 percent on $70-$100 per barrel and 80 percent on over $100 per barrel.

In the short term, Bell said that Emirates NBD does not expect any change in production policy from Saudi Arabia in response to the IPO, with the kingdom’s commitment to the OPEC+ production cuts remaining in place.

“However, there is a risk that the oil market will need to find a new anchor dynamic once the Aramco IPO is finished,” Bell added. “There had been an underlying ‘Aramco put’ supporting markets to ensure the valuation came in close to the government’s target of $2 trillion. Once that is out of the way, fundamentals will need to re-exert their influence on oil.”