Saudi Aramco IPO

Saudi Aramco’s listing is expected to overshadow every IPO in history, as it may be valued at a staggering $2 trillion. Find out more about this oil and gas conglomerate and learn how to trade its shares with IG.

Call 1800 601 799 or email helpdesk.au@ig.com to talk about opening a trading account. We’re here 24hrs a day from 3pm Saturday to 9am Saturday (AEDT).

Contact us: 1800 601 799

Saudi Aramco IPO

Saudi Aramco’s listing is expected to overshadow every IPO in history, as it may be valued at a staggering $2 trillion. Find out more about this oil and gas conglomerate and learn how to trade its shares with IG.

Call 1800 601 799 or email helpdesk.au@ig.com to talk about opening a trading account. We’re here 24hrs a day from 3pm Saturday to 9am Saturday (AEDT).

Contact us: 1800 601 799

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When is the Saudi Aramco IPO?

Saudi Aramco could go public in 2020, but there is no confirmed date for the IPO. Saudi energy minister Khalid Al-Falih hinted that the IPO may be pushed to 2021.

Plans for the IPO were announced in 2016 but Saudi Aramco, the world’s most profitable company, pushed back the date several times due to bookkeeping and corporate structure issues. Saudi Aramco’s senior VP of finance, Khalid Al-Dabbagh, confirmed that the company is ready for the IPO, but the timing will depend on shareholders’ perception of the market. The company is likely to list on the London Stock Exchange (LSE), where its bonds are listed, or the New York Stock Exchange (NYSE).

Our analysis on the Saudi Aramco IPO

By Sam Dickens

Saudi Aramco is the world’s largest oil and gas company, based on both revenues and profit. The company produces around ten million barrels of crude oil per day, or 15% of the world’s oil supply, and generated a massive $111 billion in net income in 2018 (as a comparison Apple made $59 billion profits).

The IPO was first touted in 2016 by Mohammad bin Salman, who is now the kingdom’s Crown Prince and arguably Saudi Arabia’s de facto ruler. MbS, as he is colloquially referred as, also holds the position of Chairman of the Council of Economic and Development Affairs (CEDA) and one of his highest priorities is reducing the country’s reliance on crude oil production as part of CEDA’s Saudi Vision 2030.

MbS is looking to fund the investment required to rebalance the economy through an expected 5% sale of Aramco. It is thought that it will initially list just 1% of the company on its local exchange and then an equal proportion on an international stock exchange. Tokyo is touted as the present frontrunner due to its current favourable political climate when compared to the US, UK and Hong Kong.

In terms of valuing Aramco, the current consensus among analysts is that the company is worth around $1.5 trillion, half a trillion short of what MbS believes Aramco is worth.

Since Aramco generates a positive cash flow; the most common approach to valuing the company is to use the discounted cash flow method. One difficulty with this is forecasting what the price of crude oil will be over the longer-term. A higher future oil price would imply a more expensive valuation.

An alternative valuation technique that avoids predicting future oil prices is the comparables approach. This takes an average of the financial ratios for similar, but already public, companies to estimate a value for an unlisted company.

In the table below, we first calculated the price-to-earnings and price-to-free-cash-flow ratios for six major oil companies, then took the average of these ratios and multiplied them by Aramco’s earnings and free cash flow, respectively, to get an estimated value of $1.3 trillion for Saudi Aramco (the average of the valuations implied by the two methods).

Figure 1: Comparables valuation approach for Saudi Aramco

Price-to-earnings ratio Price-to-free-cash-flow ratio
Exxon Mobil (US) 18.1 26.8
Chevron (US) 16.5 12.7
Royal Dutch Shell (UK) 11.6 8.6
Eni (Italy) 11.1 7.6
BP (UK) 10.6 16.1
Total (France) 10.6 10.8
Average 13.1 13.

Earnings ($bn) Free cash flow ($bn)
Saudi Aramco 110.6 85.9
Average ratio (above) 13.1 13.8
Implied valuation 1,445.7 1,183.1
Average valuation 1,314.4
Discounted valuation -17.2% 1,088.8

Source: Bloomberg, IG

However, as the comparable companies used in this analysis all trade on western exchanges, a risk premium, which factors in geopolitical and security risks as well as corporate governance issues, should be built into any valuation of Aramco.

Simmering tensions between Saudi Arabia and both Iran and Qatar make these risks real, but difficult to quantify. A simplistic way of gauging what size discount to use is to take the long-term difference between the price-to-earnings ratio for the Saudi stock exchange and the US stock exchange. This discount has averaged 17% since 2006, which implies a valuation of $1.1 trillion for Saudi Aramco may be more realistic, but would still set a record for the world’s largest IPO four times over.

How to trade Saudi Aramco after its IPO

You can trade Saudi Aramco after it lists, which gives you more opportunities to gain exposure to the oil and gas giant.

After the IPO

Once Saudi Aramco has been listed, we will add the company to our share trading and CFD service.

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What will the Saudi Aramco IPO value be?

There is no confirmed Saudi Aramco IPO value yet. It has been reported that Saudi Crown Prince Mohammed bin Salman is after a $2 trillion valuation, but the final figure will depend on the outlook for oil prices, as well as Saudi oil production and exports. Ultimately, one of the world’s investment banks will set the Saudi Aramco IPO value.

What could the Saudi Aramco share price be when it floats?

The Saudi Aramco share price will depend on the final valuation and the amount of shares the business will release to the public. The Saudi kingdom plans to sell a mere 5% of the company’s shares, with the majority remaining the property of the sovereign government. After the listing, the share price will fluctuate as supply and demand changes.

Why is Saudi Aramco going public?

Saudi Aramco was originally planning on going public to raise capital for the kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), which it was expected to join. At the time, it was anticipated that the listing would push the fund’s value up to $3 trillion. However, the PIF no longer needs the cash injection so Saudi Aramco is now focusing on raising money for its own diversification and is no longer expected to be brought under the PIF’s umbrella.

What is the outlook for Saudi Aramco?

The outlook for Saudi Aramco is mixed, as a few factors should be taken into consideration when forecasting the future of the company. The short-term outlook is based mainly on its exposure to oil – therefore, the oil price. If there is an uptrend, Saudi Aramco should be pleased with the investment bank’s decision at the time of the IPO. However, fears of a recession in the US might have a negative impact on petroleum demand.

The long-term outlook will depend on the outcome of the IPO. The point of the listing is to diversify and move away from industry trends surrounding fossil fuels. If it can execute its plan, the outlook could be positive. It has already started its expansion by way of the recent acquisition of a 70% stake in Saudi petrochemicals giant SABIC.

How has Saudi Aramco been performing?

Saudi Aramco has been growing its revenue every year, while cutting production costs and reducing its carbon footprint. In 2017, net income was $75.9 billion, increasing to $110.1 billion in 2018. The half-year report for 2019 revealed net income of $46.9 billion. The company has managed to cut extraction costs of crude oil to just $7.50 a barrel and overheads are only $1.50 per barrel. Oil production in 2019 is expected to reach 12.5 million barrels a day.

Who are Saudi Aramco’s competitors?

Saudi Aramco’s competitors include Shell (£223 billion), BP (£102 billion), Chevron (£224 billion) and Exxon Mobil (£295 billion), but it trumps all these companies in terms of market cap and revenue. Surprisingly, Saudi Aramco was formed much later than its competitors, it has the least number of employees and it is the only conglomerate between the five that hasn’t listed.

Saudi Aramco management team

There are seven key executives on Saudi Aramco’s corporate management team

Amin H. Nasser President and chief executive officer
Nabeel A. Al Mansour Senior VP general counsel and corporate secretary
Mohammed Y. Al Qahtani Senior VP upstream
Abdulaziz M. Al-Judaimi Senior VP downstream
Ahmad A. Al-Sa’adi Senior VP technical services
Muhammad M. Al-Saggaf Senior VP operations and business services
Khalid H. Al-Dabbagh Senior VP Culture

Who are the Saudi Aramco IPO advisors?

Saudi Aramco has three independent IPO advisors and three global coordinators (underwriters). However, recent reports have stated that the structure might change before the IPO.

Evercore Independent advisor
Moelis & Co Independent advisor
Michael Klein Independent advisor
JPMorgan Underwriter
Morgan Stanley Underwriter
HSBC Holdings Underwriter

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FAQs

What is Saudi Aramco’s business model?

Saudi Aramco is the world’s biggest oil and gas company. Operations include the exploration, production, refining, distribution and marketing of oil and gas.

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1Based on revenue excluding FX (published half-yearly financial statements, June 2019).