Touted as the world’s biggest ever public flotation, the proposed initial public offering (IPO) of 5% of state oil company Saudi Aramco is the cornerstone of the kingdom’s bold economic reform drive. The listing promises not just to galvanise the sluggish listing pipeline of the Saudi Tadawul exchange, but have a truly global impact.
Investment banks have bid aggressively to advise on the float, which is not expected to hit the market until 2017. Much about the process is still unclear. The expectation is for downstream units to be sold, keeping investors away from the kingdom’s hallowed upstream oil reserves – the source of its market power.
The valuation is subject to fevered speculation. The $2trn number most widely circulated could in the event be at the lower end of the curve yet would still yield $100bn – four times the size of the Alibaba offering in 2014.
“Listing Saudi Aramco is akin to listing the country of Saudi Arabia itself,” says M R Raghu, head of research at Kuwait’s Markaz. “Extensive work will be required in structuring and segregating assets that should form part of an IPO and those that would remain private.”
Aramco has spent time furnishing facts and figures about its true reserve position, but transparent financial statements are lacking. “That’s something that has got to change when the IPO comes out, as they will be under pressure to keep up with international disclosure standards,” said Rhea Sthalekar, an analyst at Mumbai-based research firm Aranca.
Long-term observers of Aramco believe the company will be unwilling to give up such sensitive information. “I’m not convinced they will show up their oil and gas reserves or their full financial accounts. That would mean a massive change in culture,” said Valerie Marcel, an associate fellow at Chatham House.
Much will hinge on where the proposed overseas listing will be. New York or London could be a game changer as it would signal positive intent from the authorities to increase transparency.
Competition from the other global exchanges to dual-list could be intense. “China is vouching for a dual listing of Aramco that would put the government-owned oil giant’s shares on both the Hong Kong and Saudi exchanges in return for anchor investments from the Chinese funds,” says Raghu.
The Hong Kong exchange had IPOs worth $34bn last year, surpassing the $30bn raised in the US. Winning the mandate would boost Hong Kong stature still further. “Moreover, 16% of Chinese oil imports are from Saudi Arabia – establishing a stake in Aramco could further increase the synergies between the countries,” says Raghu.
Other analysts see London as the most likely international location to list Aramco’s IPO. "Saudi Arabia is currently not one of the 28 jurisdictions recognised by the Stock Exchange of Hong Kong. In the case of Russian issuers, it also took a number of years for HKEx to come to the view that they could list in Hong Kong and it’s questionable whether the process for Saudi Arabia could be fast-tracked,” said Philippe Espinasse, a former regional head of equity capital markets in Asia and author of IPO: A Global Guide.
HKEx may try to woo Saudi Aramco to list on its platform. But, says Espinasse, international IPOs in Hong Kong have had a pretty disappointing run, as compared to those by Chinese issuers. “At the end of the day, Hong Kong remains first and foremost a platform to list Chinese businesses.”
Whichever bourse wins out, the biggest impact will still be on the domestic Saudi market. “Locals might well sell other shares to free up cash for the Aramco sale. Foreign investors are unlikely to reach beyond Aramco given a rather downbeat earnings outlook,” said James Reeve, deputy chief economist at Riyadh-based SAMBA Financial Group. “But if the Aramco sale allows the government to step up spending again, then most of the Saudi corporate sector should benefit.”
Clearly, Saudi Aramco will need to become more transparent. “The main stumbling block, in my view, is that Aramco has a broad industrial role in the kingdom, and it may need to become more focused on its core business in order to satisfy shareholders,” says Reeve.