Biggest Issues Currently Facing the IPO of Saudi Aramco 1
Saransk, Russia - January 28, 2016: A computer screen shows details of Saudi Aramco report on its web sites in Saransk, Russia, on January 28, 2016. Selective focus.

Saudi Arabia to list its oil titan

As part of its economic diversification initiative, the Saudi government intends to take it’s oil titan Saudi Aramco public, and turn the business from “an oil producing company into a global industrial conglomerate,” according to the Kingdom’s Vision 2030 economic plan.

Saudi Arabia’s (KSA) plan to list the oil giant Aramco in 2018, as ratified by its CEO Amin Nasser, is set to make history.

  1. It would be the biggest IPO in history
  2. Listing just 5% of the parent company could raise about $100 billion (the company’s valuation stands at $2 trillion).
  3. If listed on the Tadawul (GULF) (GAF), the IPO would represent 83% of the Tadawul stock exchange’s market cap.

Issues facing the IPO

  1. Saudi Aramco currently pays 20% royalty as it has exclusive rights to explore for, produce, and export oil from Saudi Arabia’s oil reserves. It also pays an 85% tax on its revenue to the Saudi government. So, listing the company under these circumstances could lead to a lower valuation for the company, as dividends could be scarce. Lowering the tax rate to say, 50% may benefit the company’s valuation, but would hurt state revenues at a time when the country is seeking to plug its enlarging fiscal deficits on account of lower oil prices.
  2. While valuing the company’s upstream and downstream business was a relatively straightforward process, valuing Saudi Arabia’s oil (OIL) (USO) reserves, over which Aramco has exclusive rights, will be a difficult task when valuing the IPO.
  3. There is also uncertainty around how much of the listed entity would be owned by Saudi Arabia’s top sovereign wealth fund, the Public Investment Fund (PIF). In a statement in May 2016, Aramco CEO Amin Nasser said production decisions were sovereign matters that would remain with the government. This could lead to the possibility of the entire non-public stake staying with the Saudi government through its PIF. Inviting investments in a company where the board has no say on production decisions could pose problems down the road.

Once the IPO is through, it will be interesting to see Aramco balance the national role it plays in Saudi Arabia and the profit-centered role shareholders will expect from it.

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