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Should You Invest in the Saudi Aramco IPO?

The global oil and gas market of publicly traded stocks is about to get bigger with the launch of Saudi Aramco. The government-owned Saudi Arabian oil company provided preliminary pricing details for its highly anticipated initial public offering on Nov. 17.

This paved the way for local banks and institutional investors to place orders for the 1.5% of outstanding shares offered to the public. The final pricing of the shares is expected on Dec. 4, while trading at Tadawul Stock Exchange takes place on Dec. 11.


The IPO highlights

Early estimates provided by the company to prospective investors priced a single share of the stock between 30 riyals and 32 riyals ($8.10 to $8.64), which based on the number of shares on offer would value the IPO at around $24.3 billion to $25.9 billion. The high end of that estimate would make Aramco's IPO the biggest ever, just ahead of Alibaba Group Ltd.'s (NYSE:BABA) 2014 debut, which was valued at $25 billion.

Taking the given IPO price estimates, this effectively values Saudi Aramco at about $1.62 trillion to $1.73 trillion, making it the biggest publicly listed company in the world in terms of market capitalization.

That's just about the average of the initial valuation estimates from fund managers and the Saudi Crown Prince, who earlier put the value of the company at about $2 trillion. On the other hand, some analysts, led by Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS), had estimated the valued of the company at as low as $1.1 trillion, while others went as high as $2.5 trillion.

The disparity in valuation has contributed to what some have termed as an exodus of foreign investors, which is why 73% of the orders placed for shares have come from local banks and institutional investors. Analysts point to declining oil prices and the projected slowdown in energy demand amid the growing adoption of non-fossil fuel energy sources as a huge risk for investing in Saudi Aramco.

International listing could take a while

Some early reports hinted that the company could follow the Tadawul listing with an international listing. This attracted the likes of the New York Stock Exchange, as well as the London, Hong Kong and Tokyo exchanges.

In 2017, President Donald Trump urged the company to list in New York, but this now looks very unlikely as some analysts are suggesting that the IPO could be 35% overvalued. But despite these challenges, foreign investors could yet buy shares of Saudi Aramco in the secondary market should the outlook become more appealing after the IPO.

Alternative investment platforms that offer large-cap shares already trading appear to be set to offer foreign investors an opportunity to profit from the IPO. For instance, eToro, a leading online brokerage platform, has already added Saudi Aramco to the list of tradable assets on its platform in readiness for the first day of trading. More brokers are expected to follow in the coming weeks.

Conclusion

In summary, the Saudi Aramco IPO opens the Middle East up to the world by tapping into one of the most valuable resources the region has to offer. Saudi Arabia is the world's largest provider of fossil fuels and, for many years, the opportunity to invest in Aramco, the world's most profitable company, has not been afforded to the public.

The company's profitability is what makes some analysts value it so highly. In its latest financial year, it reported profits of about $111 billion, which is more than the profits of Apple Inc. (NASDAQ:AAPL), Royal Dutch Shell (NYSE:RDS.B) and Exxon Mobil (NYSE:XOM) combined. This IPO creates an interesting avenue that investors can use to invest in Saudi Arabia's crown jewel.

Disclosure: I have no positions in the stocks mentioned.

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This article first appeared on GuruFocus.