ARAMCO – AS SLIPPERY AS OIL

The world’s biggest IPO will open on Sunday.

ARAMCO, Saudi Arabia’s largest oil company is going public and the much talked about and 6-years late IPO finally opens on 17th Nov. The sheer size of the issue is baffling – it aims to raise around $40 billion, which is much higher than Alibaba’s $25 billion IPO.

What remains the biggest bone of contention is the valuation. Despite having published an over 600-page prospectus, there is very little detail as the number of shares on offer, the pricing, date of listing – nothing is mentioned. There is a mention in the prospectus though that individual/retail investors will be offered 0.5%. For institutional investors – zilch information on size and pricing. And yet, foreign investors are queueing up to invest. China, obviously with geopolitical benefits in mind is investing $10 billion.

Based on reports in the Gulf newspapers, what we learn is that Aramco plans to raise around $40 billion by selling around 0.5% to 1.5% of its shares to institutional investors, individual Saudis and other Gulf nationals. The exact percentage of shares to be sold in the IPO is not yet known. The final share price will be determined on December 5 – a day after the issue closes for institutional investors. Can you imagine any other company collecting all this money without spelling out the exact number of shares on offer and more importantly, the valuation.

Once listed, its market cap will easily surpass that of the current number one Microsoft, which is currently valued at $1.1 trillion. To put Aramco’s size into perspective – its profits in 2018 was more than the combined profit of  Microsoft, Amazon, and Apple.

Its oil reserves are stated to be at 226.8 billion barrels and is one of the most efficient oil producer, with cost of production low at $2.80 per barrel, giving it a much bigger margin than any other oil making companies in Russia, Venezuela, and Nigeria.

As one can see, the valuation arrived at by various analysts across the globe has a wide range – between $1.1 trillion to even $2.5 trillion. No one is able to arrive at exactly how much Aramco’s worth. It is based on its profitability of course and its efficiency first. But then will you give money to a company which is going to use this for the benefit of the country and not for the company’s benefit itself. It’s like say, ONGC collecting truckloads of money from an IPO and using it to invest in Swachch Bharat scheme. How does this help create value for you, the minority shareholder? Aramco plans to use all the money from the IPO for funding the King’s National Transformation Program, which aims to diversify the oil-dependent Saudi economy and improve domestic infrastructure and health care. Despite this, FIIs are rushing to invest in Aramco.

This strikes as hugely incongruous. In India, Coal India is a monopoly and Govt is the majority stake holder. Do you remember how The Children’s Investment Fund (TCI) which held 1.1% stake in the PSU threatened to sue the company for bowing down to the Govt, when it came to pricing. And in Aramco, all decisions, right from whether or not to cut down production comes from the King. Aramco sells a third of its oil at a discounted rate domestically – that’s ok?

Thus the IPO of Aramco is not about maximizing value for the minority shareholder but as piggybanks for sovereigns with different geopolitical agendas and focus on the needs of the state. So if you are a retail investor or non-sovereign fund, you will find yourself often questioning Aramco’s decision-making. Also remember, in terms of transparency, one cannot expect much to come forth unless it gets listed on US or London stock exchanges; currently it needs to follow rules of just the Saudi exchange which are pretty flexible. The prospectus is proof enough of this.

Aramco has committed to a $75 billion annual dividend through 2024. Maybe that’s the lure?