What was once being hailed as far and away the largest initial public offering in stock history will probably turn out to be a much more modest affair.
Saudi Aramco, the state-owned oil company of Saudi Arabia, will begin trading on the Tadawul stock exchange in Saudi Arabia in December. But the $2 trillion valuation that Saudi Crown Prince Mohammad bin Salman had wanted no longer seems obtainable.
Saudi Arabia will now target a valuation range of $1.6 trillion to $1.71 trillion, still enough to make Aramco the world’s most valuable publicly traded company, ahead of Apple and Microsoft, both of which are worth around $1.15 trillion.
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In addition to paring its valuation, Saudi Arabia is now looking to sell a mere 1.5% stake in its oil company, down from a previous target that was upward of 5%. An IPO at the top of the valuation range would raise $25.6 billion, enough to make it the world’s largest IPO ever, ahead of Alibaba’s $25 billion haul in 2014. But an IPO at the midpoint of the range would only raise $24.8 billion, falling short of the record.
Foreign Investors Hesitant
The relatively humble debut for the Saudi oil giant comes as foreign investors have been reluctant to pay for anything to do with fossil fuels. The energy sector’s weighting in the S&P 500 is currently 4.4%, the lowest level in modern history, as investors anticipate a peak for oil demand in the coming years.
Saudi Arabia is reportedly no longer marketing the IPO to foreign investors, and instead will rely on domestic investors to buy shares. The kingdom is offering loans and dividend guarantees to compel local investors to support the public offering.
Demand for the IPO has been relatively tepid, even though Aramco is the most profitable company in the world. The company generated net income of $111 billion in 2018, double what Apple made and more than five times what Exxon Mobil made last year.
Aramco has said it will begin paying a $75 billion dividend starting in 2020, which will be guaranteed through 2024, regardless of what oil prices do. That translates into a dividend yield of 4.5% at the midpoint of the IPO range.
Pros & Cons
Aramco’s dividend yield is in line with what oil majors like Exxon, Chevron and others are paying. Exxon currently yields 5%; Chevron yields 4%; ConocoPhillips yields 2.8%; BP yields 6.3%; and Royal Dutch Shell yields 5.4%.
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Yet as a company that is majority-controlled by the Saudi state, Aramco may be perceived as riskier than those oil majors, explaining foreign investors’ reluctance to invest. After all, only two months ago, a catastrophic attack on Saudi oil facilities led to the temporary shuttering of half the kingdom’s oil production.
Aramco is also subject to production quotas set by the Organization of Petroleum Exporting Countries, which often pushes its members to cut output.
On the other hand, as the owner of some of the world’s largest oil reserves, with some of the lowest-cost production on the planet, Aramco has an easier time pumping oil than some of its rivals. In 2018, Aramco produced 10.3 million barrels of crude oil per day and held reserves of nearly 300 billion barrels.
Despite being the most valuable publicly traded company in the world, Aramco won’t make that big of a splash in U.S.-listed ETFs. Its most notable weighting will probably be in the $726 million iShares MSCI Saudi Arabia ETF (KSA) and the $3 million Franklin FTSE Saudi Arabia ETF (FLSA).
Both ETFs hold market-cap-weighted baskets of Saudi equities, but cap the weighting of any individual stock at 25%. That means, even with its tremendous valuation, Aramco’s weighting will be tempered somewhat.
Aramco could also find itself a part of broader ETFs, like the $64 billion Vanguard FTSE Emerging Markets ETF (VWO), the $57 billion iShares Core Emerging Markets ETF (IEMG) and even the $13 billion Vanguard Total World Stock ETF (VT). For reference, Saudi stocks currently make up about 2.5% of IEMG.
Index providers MSCI, S&P Dow Jones and FTSE Russell told Reuters that they are considering fast-tracking the Aramco IPO so that it could be included in indices as soon as December. If so, investors could find shares of the company in emerging market and broader international equity ETFs soon after.