INSIGHT: Saudi Aramco valued at up to $1.7tr; share offers begin

Author: Pearl Bantillo

2019/11/18

SINGAPORE (ICIS)--Saudi Aramco’s valuation is expected to be as much as $1.7tr based on the high end of the price range of the initial public offering (IPO) of the world’s biggest crude exporter.

Some three billion shares, representing a 1.5% stake in the oil giant, were made available for subscription from 17 November at Saudi riyal (SR) 30-32 each ($8-8.53).

At SR32 per share, the IPO proceeds are estimated at more than $25bn. The final IPO price will be set after the bookbuilding process, and the actual date of listing on the Saudi Stock Exchange or Tadawul has yet to be announced.

Retail investors were given until 28 November to subscribe, while the deadline for institutional investors is 4 December.

The final IPO price will be set after the bookbuilding process. Saudi Aramco's IPO could beat the $25bn New York listing of Chinese e-commerce giant Alibaba  in 2014 as the largest in the world.

But the offer size was much lower than initial expectations of a 5% listing, while Saudi Aramco's enterprise value was below the initial target of $2tr set by Crown Prince Mohammed bin Salman.

Saudi Aramco has decided to pursue a domestic listing after years of planning the IPO, which hit a snag when oil prices slumped in 2014 and stayed depressed for years due to oversupply, causing Saudi Arabia to post record budget deficits, thereby underscoring its Achilles heel – oil revenues.

A second listing on a major international bourse such as New York, London or Tokyo may be possible in the future, but not for now.

Saudi Aramco's decision to proceed with the IPO also came despite a series of attacks Saudi Arabia's facilities this year, the latest of which was the 14 September attacks at its oil facilities, which temporarily crippled half its crude production.

Operations at the company's Shaybah NGL (natural gas liquids) facility and at the  East-West pipeline were disrupted following attacks by unmanned aerial vehicles in August and May, respectively.

These attacks, along with expectations of weak crude demand amid the global economic slowdown being aggravated by the 16-month long trade war between the US and China, may have whittled down Saudi Aramco's IPO size and valuation.

In its prospectus, the company projected that global demand for crude would grow at a compounded annual rate of 0.8% from 2018 to 2030, while it forecast ethylene demand growth at 3.3% “primarily due to an anticipated growth in demand from China and North America”.

Saudi Aramco is pursuing the IPO after embarking on a string of acquisitions of downstream petrochemical businesses, the biggest of which is the $69bn acquisition of a 70% stake in SABIC, expected to close in the first half of next year.

“Following the closing of the SABIC transaction, the company’s chemicals business will operate in over 50 countries and produce a range of chemicals, including olefins, ethylene, ethylene glycol, ethylene oxide, methanol, MTBE [methyl tertiary butyl ether], polyethylene and engineering plastics and their derivatives, among other products,” Saudi Aramco said in its prospectus released in early November.

The acquisition of a majority interest in SABIC “will advance its strategy to increase the proportion of petrochemicals production in its downstream portfolio and support the company’s downstream growth ambitions,” it said.

Saudi Arabia is on a serious mission to diversify its economy by investing heavily in downstream businesses, to wean itself off too much reliance on oil revenues, and a bigger exposure to Asia is part of such strategy.

“In addition to its domestic focus, the Company is focusing its downstream investments in areas of high-growth, including China, India and Southeast Asia, material demand centres, such as the United States, and countries that rely on importing crude oil, such as Japan and South Korea,” Saudi Aramco said.

In Malaysia, it entered into 50:50 refining and petrochemical joint ventures with PETRONAS, collectively called PRefChem, last year. These are Pengerang Refining Co and Pengerang Petrochemical Co.

PRefChem is expected to be able to process 300,000 bbl/day of crude oil and produce Euro 5 gasoline and diesel and other refined products, as well as feedstock for the production of 3m tonnes/year petrochemical products. Saudi Aramco said the project should be operational in the second half of next year.

“The project will provide … [Saudi Aramco] with long-term placement of 150,000 barrels per day, with an option for an additional 60,000 barrels of crude oil per day and the offtake rights for 50% of production, including gasoline, diesel, kerosene, olefins, polymers and glycol.

In India, Saudi Aramco is also looking at taking a 20% stake in Indian conglomerate Reliance Industries Ltd’s (RIL) oil-to-chemicals division.

In South Korea, it is acquiring 17% of refiner Hyundai Oilbank for SR4.7bn, with an option to acquire an additional 2.9% equity interest.

Hyundai Oilbank has a fully integrated refining plant in Daesan with a processing capacity of 650,000 bbl/day. The deal is expected to close in the first half of 2020, it said.

A more diversified business bodes well for Saudi Aramco but growth prospects are currently clouded by general weakness in the global economy and heightened geopolitical risks in the Middle East.

Thumbnail image: A billboard in Jiddah, Saudi Arabia, reads: "Saudi Aramco, soon on stock exchange."
Source: Amr Nabil/AP/Shutterstock

By Pearl Bantillo

($1 = SR3.75)