The Saudi Aramco IPO: the Biggest IPO in History… Plus the Future of Oil

If it was any other company selling off just 1.5% of its shares, it would hardly rate a mention. With such a small holding, you might even wonder: what is the point?

Yet when that company is Aramco — the Saudi state-owned oil monolith — everyone, and I mean everyone, in the markets is watching.

1.5% might seem like an insignificant shareholding. However, given the sheer size of Aramco that equates to US$25.6 billion, making it the biggest IPO in history.

It also gives Aramco a market value of a whopping $1.7 trillion. Mind you, that’s $300 billion less than the hoped for $2 trillion, when the IPO plans were revealed back in 2016.

At $1.7 trillion, though, that easily makes Aramco the biggest company in the world. At that value, it is worth some $500 billion more than tech titans Apple and Microsoft, which are each worth around $1.2 trillion.

With all these billions and trillions, it is almost impossible to get your head around all those zeros!

With the Aramco float, however, it has been anything but clear sailing.

The world turned its attention to Saudi Arabia for all the wrong reasons in October last year, when Saudi journalist Jamal Khashoggi was murdered inside the Saudi consulate in Turkey.

There has also been upheaval amongst the country’s elite, as Saudi’s crown prince launched a crackdown on corruption.

Perhaps the biggest issue, however, has been putting a value on Aramco. When the big US investment banks got cold feet at the proposed $2 trillion price tag, the crown prince simply went with two Saudi institutions and HSBC instead.

For banks and institutions to get hold of any shares, they could only approach one of these three.

International exchanges, which bid so keenly for Aramco’s listing, also missed out. When trading in Aramco shares begin, they will be listed on the Saudi stock exchange.

As Bloomberg reports, Saudi Arabia has been pro-active in getting the deal done, including lowering the tax rate three times for Aramco, a huge promised dividend, and the potential for bonus shares for retail investors who decide to sit on their shares.

What will determine the success of the Aramco IPO?

Despite these incentives, however, there is one key factor that will ultimately determine the Aramco IPO’s success. That is, the price of oil.

For decades, the oil price has been driven by a swathe of changing and competing factions. At the centre was the Organisation of the Petroleum Exporting Countries (OPEC).

By literally turning ‘on’ or ‘off’ the tap, OPEC controlled the amount of volume hitting world markets. And in doing so, finessed the price of oil.

However, that all changed with the shale oil revolution that hit the US a decade ago. With so much surplus oil and gas on the market, the oil price headed mainly in one direction…south.

With the Aramco IPO front and centre of their mind, the Saudis have once again been active in OPEC, seeking production cuts to help bolster the price of oil.

As reported by the Wall Street Journal, OPEC agreed in cutting crude output by as much as 40% next year, when it met in December (2019).

As it reports, that equates to around 1.7 million barrels a day. That’s on top of the current curb of around 1.2 million barrels a day. Importantly, some of the other heavy hitters (but not OPEC members) like Russia have also agreed to the cuts.

The real test for Aramco, however — and other crude producers — will be played out over a much longer timeframe.

In the short-term prices can be influenced by changing levels of production. However, it is the longer-term demand/supply equation that will determine the success, or otherwise, of Aramco.

Some economists are already predicting a global slowdown in 2020. While the demand for oil will decline as the transition to electric vehicles takes place, this will likely take decades to play out.

It will, however, put a cap on investment in new oil production — something that could support the price of oil.

In the meantime, the world needs reliable fossil fuels to keep the economy turning. Until a cheaper, cleaner and reliable substitute can be found — and is available to the masses — the demand for oil will only decline gradually, leaving Aramco to keep raking in its billions.

All the best,

Matt Hibbard,

For Money Morning

PS: While Aramco is capturing all the headlines, there are countless other resource plays on the market. To find out about the best 10 of those, please click here.

Money Morning Australia