Article / 15 February 2017 at 16:00 GMT

Low oil price no barrier to mega Aramco IPO

Consulting editor / TradingFloor
Norway
  • Saudi Arabia to float stake in its oil company set to become biggest IPO ever
  • Surprisingly, niche investment bank Moelis chosen as sole adviser for 2018 IPO
  • Other banks scrambling to underwrite the stock offering
  • Officials expect state-owned Aramco to be worth at least $2 trillion: Reuters
  • Preparations for IPO come amid delicate rebalancing of the oil market
Saudi Aramco control room
Preparations are under way for the world's biggest IPO. 
Image: screen capture from video on Saudi Aramco website

By John Acher

Colossal. Gargantuan. Biggest in history. No, that's not Donald Trump talking. These words and phrases only feebly express the vast size of the deal at hand when Saudi Arabia floats stock in its oil company, Saudi Aramco. Estimated to be worth trillions of dollars, it is said to be the world’s most valuable company.

The flotation is set to happen next year and, despite the immense value of the deal, it is not one of the well-known players that was chosen as sole adviser, but a niche investment bank.

In a surprise move, Saudi Arabia has chosen New York-based boutique investment bank Moelis & Co to advise it on the sale of Saudi Aramco shares, according to the Financial Times, which added that "other banks are still in the race to underwrite the offering.”

It “is expected to be the biggest IPO in history if it happens, as expected, next year,” said CNN Money.

The advisory role is a triumph for Moelis, which itself went public less than three years ago and has been engaged earlier in far smaller deals, including Samsonite's $1.3 billion IPO in 2011 and plastic pipe company Polypipe Group's £320 million IPO in 2014. The firm is named after founder and chairman, Ken Moelis.

Shares in Moelis & Co leapt on the news of the bank's selection and are up nearly 10% since then, closing at $38.40 on Tuesday.

The invitation to evaluate Aramco's business and help it with measures related to the share sale had gone out to big-name banks including Morgan Stanley and HSBC, Reuters reported.

It’s gonna be yuuuuuge

Saudi officials expect to value the state-owned company at a minimum of $2 trillion, according to ReutersBut estimates of the market value vary widely – from $1.25 trillion to $10 trillion. The higher figure would make Aramco worth nearly 13 times Apple’s $700 billion and 28 times ExxonMobil’s $350 billion market capitalisation. 

Even just a sliver of Aramco – some reports suggest a 5% stake will be offered – could be worth $100 billion (this is the valuation of a 5% stake based on the estimate published by Reuters), which would make it the biggest initial public offering on record, four times as big as Chinese online retailer Alibaba’s sale in 2014, which is the current record-holder.

The Wall Street Journal last summer said the Saudi Aramco IPO would be the “biggest fee event in Wall Street history,” potentially generating as much as $1 billion in fees for banks and brokerages and would “help define success or failure on Wall Street for years to come.” 

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Wall Street is salivating at the prospect of the Aramco IPO. Photo: Shutterstock

Diversifying

The planned sale of a Saudi Aramco stake is a key part of the desert kingdom’s ambition to attract foreign investment, reduce its one-sided dependence on oil and diversify into other industries. The proceeds from the sale are expected to be reinvested in non-oil industries, creating further potential for investment banks to advise Saudi Arabia on future deals.

Stock exchanges from New York to London, Tokyo to Hong Kong hope to be chosen by the Saudis as for a listing alongside a primary listing on Riyadh’s Tadawul.

Saudi Aramco is a giant by any measure. Headquartered in Dhahran, it produces 10.2 million barrels/day of oil – equal to one tenth of the world’s daily output – manages proven conventional crude oil and condensate reserves of 261.1 billion barrels and natural gas reserves of 297.6 trillion standard cubic feet, according to the group’s website.

Volatile oil

The preparations for the Saudi Aramco IPO take place amid persistent oil-market uncertainty and a painfully slow rebalancing after crude oil prices collapsed. The 2014-16 oil price plunge has put a strain on the public finances of even oil-rich countries, though Saudi Arabia is hardly the worst-off in this respect.

After falling from a peak of $115/barrel in mid-2014 to below $35/b by the end of February 2016, largely due to a sharp increase in US production from shale oilfields, oil prices have recovered to the mid-$50s, but a return to $100/b levels is seen as only a distant prospect.

Ole Hansen, Saxo Bank's head of commodities strategy, said the positive impact of oil producers' ongoing attempts to support the oil price by cutting output will probably only be felt properly in 2018. "Rising demand growth and a reduction in the global overhang of supply is likely to support higher prices in the medium to long term despite the expected increase in non-Opec production, especially from shale oil production," Hansen said.

Despite the mega size of the planned Aramco offering, the deal will likely find plenty of demand among fund managers around the world and is unlikely to affect the oil markets or oil investment. "I do not think it will divert funds away from investment projects elsewhere," Hansen said.

Saudi Arabia map with city of Dhahran
 Based in Dhahran, Saudi Aramco is estimated to be the world's 
most valuable company. Image: Shutterstock


— Edited by Clemens Bomsdorf

John Acher is a consulting editor at TradingFloor
3y
helicongrowth helicongrowth
You don't suppose they will create an oil price squeeze in time for the IPO ????
3y
John G Acher John G Acher
You should be advising the Saudis, helicongrowth.

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