Aramco IPO: stay away or rush in?

We look at the upcoming IPO of Aramco shares, and the potential valuation of the firm as well as the risks to investors.

Aramco’s valuation up in the air

Anyone looking at putting money into Aramco shares when they list will want to know how much the firm is worth. Unfortunately, at present the estimated valuation produced by investment banks ranges from $1 trillion to $2 trillion.

Even if it is only worth around $1.5 trillion, this would still make it the largest company in the world, according to PWC. This would make it bigger than the entire stock markets of some countries. Investors will only have a small slice of this giant pie, but even 5% of a $1 trillion company is still $50 billion. Aramco plans to pay out $75 billion in dividends, five times the size of Apple’s dividend, which is the biggest payout in the S&P 500.

As the Wall Street Journal’s James Mackintosh notes, valuing Aramco on similar metrics to US oil giants Exxon and Chevron would make it worth around $1.5 trillion, using earnings, or $1.25 trillion using cash flow. For a dividend comparison, he notes, it would need to have a yield of 3.8% to be worth $2 trillion, which would mean its yield is below that of Exxon and Chevron, companies that do not have the same political issues as Aramco.

Will Aramco’s valuation have a ‘margin of safety’?

Oil demand has been weak of late, while supply has been plentiful thanks to US shale. If demand does pick up, then we can expect Aramco’s cash flow to increase, potentially boosting its dividend too. But for any valuation, there must be a ‘margin of safety’, as value investors like Ben Graham and Warren Buffett would argue. This means that the valuation needs to account for potential difficulties in the future, and for Saudi Arabia that could be anything from war and revolution to just political disturbances and regular crackdowns on dissidents.

As a result, investors may well balk at a valuation that is too high. It would appear to promise too much in terms of oil prices, and also not leave sufficient room for any political or geopolitical disturbances. For example, a conflict in the Middle East could see Aramco’s facilities targeted, while disturbances in Saudi Arabia might see the government look to take more cash from Aramco to help placate the populace.

Such events will depress the stock price, and hit the valuation as well. If the worst happened, the company might disappear entirely, leaving investors with nothing. Some might point to the parallels with Imperial Russia – investors in Russian infrastructure prior to the First World War lost practically everything when the Tsarist regime collapsed. This is an unlikely prospect for Saudi Arabia, but investors must always be aware of the potential pitfalls.

Aramco might be a wonderful investment, with the initial public offering (IPO) a savvy move by a forward-looking Saudi government. But it could also be a major headache. Only time will tell.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

See opportunity on a stock?

Don’t miss your chance. Try a risk-free trade in your demo account, and find out whether your hunch could have paid off.

  • Log in to your demo
  • Try a risk-free trade
  • See whether your hunch pays off

See opportunity on a stock?

Don’t miss your chance. Upgrade to a live account to take advantage.

  • Trade a wide range of popular global stocks
  • Analyse and deal seamlessly on fast, intuitive charts
  • See and react to breaking news in-platform, when it matters

See opportunity on a stock?

Don’t miss your chance. Log in to take advantage while conditions prevail.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Bid
Offer
-
-
-
-
-
-
-
-
-
-
Bid
Offer
Bid
Offer
-
-
China 300
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Sunday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.


For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.