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Aramco's initial public offering (IPO) is the centerpiece of the
Saudi crown prince's vision for diversifying the kingdom away
from its oil dependence by using the $25.6 billion raised to
develop other industries.
But that is well below his 2016 plan to raise as much as $100
billion via a blockbuster international and domestic IPO.
Riyadh scaled back its ambitions after overseas investors
baulked at the proposed valuation and only 1.5% of Saudi Arabian
Oil Co (Aramco) shares were listed on the Riyadh stock exchange
on Wednesday, a tiny free float for such a huge company.
Aramco shares hit 38.7 riyals ($10.32), lifting its market value
above $2 trillion and closed at 36.8 riyals, a rise of 4.5% from
Wednesday's close and valuing the company at $1.96 trillion,
Refinitiv data showed.
While a 10% jump in the stock on its debut, the maximum allowed
by the Riyadh exchange, was hailed by the Saudi government as a
vindication, support was largely from loyal Saudi and Gulf
rather than overseas investors.
The IPO was front page news in mainstream Saudi media, with
headlines such as "Aramco at the top of the world" and "A dream
come true".
But Bernstein analysts put Aramco's value at around $1.36
trillion, which compares with U.S. energy giant Exxon Mobil's <XOM.N>
market capitalization of less than $300 billion.
"Saudi Aramco is the largest, most profitable oil company in the
world - but size is not everything," they wrote, flagging the
risk of slow net income growth if oil prices stay flat.
An International Energy Agency (IEA) report pointed to pressure
on oil prices, predicting a sharp rise in global inventories
despite an agreement by OPEC and its allies to deepen output
cuts as well as lower expected production by the U.S. and other
non-OPEC countries.
Bernstein said Aramco should trade at a discount rather than a
premium to international oil majors, with corporate governance
"the key risk" as the Saudi government owns more than 98% of it.
"For actively managed funds, one of the key considerations –
aside from valuation – will be ESG (environmental, social and
corporate governance) criteria," said Tim Love, Investment
Director for emerging markets equities at GAM.
Some 15.9 billion riyals worth of Aramco shares were traded by
the close, with around 417.7 million shares exchanging hands,
Refinitiv data showed. This made up most of the total turnover
of the whole Riyadh market which was 18.5 billion riyals.
"Initial price action has validated our thesis that Aramco
discounted its IPO price to leave upside on the table and allow
regional investors to benefit from the listing of its crown
jewel," Zachary Cefaratti, CEO of Dubai-based Dalma Capital,
which invested in the IPO, said in a note on Thursday.
"The average institutional investor received less than 1/6th of
the shares they bid for in the IPO, and have had to buy shares
on the open market," Cefaratti said of the Aramco deal, which
became the world's largest, topping the $25 billion 2014 listing
of China's Alibaba <BABA.N>.
TAKING GAINS
The successful completion of the IPO has also led to a
strengthening of Aramco's dollar bonds, which are now trading at
yields closer to Saudi Arabia's sovereign debt.
"It makes sense for Aramco to trade level with the sovereign, as
Saudi Arabia's economic is still so dependent on oil, but the
goodwill from the IPO has certainly helped," one banker who
worked on the Aramco bond issue said.
For its shares, Aramco's decision to sell a smaller proportion
of its equity and rely mainly on domestic and regional buyers,
means some analysts predict a lag before they settle.
Most of the early trading was small scale, of 1,000-1,500
shares, a trader in Riyadh, who asked not to be identified,
said, adding this signaled that some retail investors were
"happy with a 6 riyal per share gain".
Aarthi Chandrasekaran, portfolio manager at Abu Dhabi-based
Shuaa Capital, said it was too early to draw conclusions.
"We shouldn’t be reading too much into intraday dips. Let’s not
forget that more than 93% of the market is still dominated by
retail investors, and like in any IPO issuance flippers will
exist," Chandrasekaran said.
Another trader said that Saudi investors are reluctant to leave
their money in the market ahead of the weekend as many lost
millions when global markets collapsed over the weekend during
the financial crisis and they were unable to exit.
Aramco shares will also join the Tadawul index and global
benchmarks such as MSCI and FTSE next week, which analysts said
should fuel demand, particularly from "passive" investors.
A Gulf analyst, who asked not to be identified, said investors
could be driven by Riyadh's own valuation view.
"Investors will debate: why should it go higher ... while its
owners value it at $2 trillion?" he said.
(Reporting by Davide Barbuscia and Marwa Rashad; Additional
reporting by Karin Strohecker and Saeed Azhar and Abhinav
Ramnarayan; Writing by Alexander Smith; Editing by Carmel
Crimmins)
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