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Aramco: never mind the drones, feel the profits

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By Francesca Young, Mariam Meskin, Sam Kerr
19 Sep 2019

Saudi Aramco, the state-owned oil company of Saudi Arabia, is confident that its exceptional financial position will allow its IPO to withstand geopolitical shocks such as the drone attack on the company’s oil facilities last Saturday, write Sam Kerr, Mariam Meskin and Francesca Young.

Both oil prices and political tension in the Middle East spiked after the drone attack. Until the weekend, Aramco’s IPO had seemed to be on a fast track, with a possibility it could be done this year.

Although a Yemeni rebel group claimed responsibility for the attack, it has also been linked to Iran, Saudi Arabia’s main regional adversary.

Aramco met with the banks on its top line last week in Saudi Arabia. The banks already mandated for the deal include Bank of AmericaCitiCredit SuisseGoldman SachsJP MorganMorgan Stanley and HSBC.

Sources close to the transaction bemoaned the timing of the attack just as as the IPO was building up steam.

“Our sincere hope is that the market recognises what incredibly high quality assets they are,” said a source working on the Aramco deal. “Last weekend was hugely unfortunate but there are a number of people working incredibly hard on the situation.”

The weekend’s attack was a topic of discussion among attendees at the Euromoney Saudi Arabia Conference in Riyadh this week.

However, most of the opinions expressed there in the aftermath of the attack, which wiped out about six million barrels of Aramco’s oil stocks, were optimistic. Most bankers, chief executives and government figures brushed off the notion that the assault would halt the IPO.

Ammar Alkhudairy, chairman of Samba Financial Group, told GlobalCapital: “It was an unfortunate act of terrorism — it was an escalation of tension. But Saudi Arabia has always been measured and calculated in its response to these events, and I think it will take its time contemplating the options before it does anything.”

Aramco then confirmed on Tuesday that the attack would not derail the much-awaited listing, which put most delegates in high spirits.

One participant at the conference said the announcement had come as a “positive surprise”, reiterating the point that most involved in Saudi Arabia, whether in the oil or financial sectors, viewed the attack as an unfortunate blip, though not an obstacle.

Aramco set itself a deadline of 12 months for the completion of the IPO, but GlobalCapital understands a local listing could be completed in as little as three, should it push for an accelerated deal.

While sources would not commit to a November listing, as has been rumoured in the past few weeks, most were confident the issuer would meet its deadline.

“I think everyone has to give themselves a buffer,” said the first Aramco deal source.

All about the money

Sources close to the sale hoped tensions in the region would not dim the enthusiasm of the large global institutional investors that Aramco is hoping to attract into the order book.

“It is moving ahead as far as we know,” said a second source working closely on the IPO. “It is a big old raise; an institutional component to the deal is going to be crucial and I would not be completely reliant on local demand.”

GlobalCapital understands that the syndicate of banks will target sovereign wealth funds to anchor, or even cornerstone the deal. Aramco expects a huge post-IPO valuation, backed by stellar financials.

Aramco revealed in April that it recorded net profit of $111bn in 2018 from revenues of $356bn.

It is the most profitable company in the world and, if it listed at a comparable ratio to other multinational oil and gas companies such as Shell or BP, it should command a valuation of about $1.5tr.

Given the sheer size of its balance sheet, there have been suggestions that the company could command a $2tr market capitalisation, and this is said to be Saudi Arabia’s target, given it makes almost twice as much profit as the second most profitable company on earth, Apple, which has flirted with a $1tr market capitalisation.

Saudi Arabia is also said to be putting pressure on the kingdom’s wealthiest families in pursuit of its $2tr target, the Financial Times reported as GlobalCapital went to press.

Even so, Aramco hopes that international investors will look at its profits, and what could be a hefty state-guaranteed dividend, as enough to offset the geopolitical risk.

That risk could increase, according to one equities investor familiar with the Middle East, who said the growing hostility between Saudi Arabia and Iran made further attacks likely.

Sources intimated that should there be further attacks, and should Aramco not get the valuation it thinks it deserves, then it may postpone the IPO again.

The final decision will rest with the government and, in particular, with Saudi crown prince Mohammad Bin Salman Al Saud.

“At the end of the day, this is all going to be up to [Bin Salman] and how badly he wants the funds from the IPO,” said the investor.  

“There is an element of political risk, but how that affects demand is the question,” said the second deal source. “The reality is that if you end up in a scenario where the state is effectively guaranteeing a dividend on a piece of paper, where you get what is effectively a bond with equity-like properties, then that is pretty attractive in that environment. The devil is going to be in the detail.”

An investor at a large global asset manager said that he was looking closely at the IPO, but was waiting to meet with the company before making a decision and that the chance of further attacks was on his mind.

“This now seems to be part of the risk that we are going to have to assess when we look at the company,” said the investor. “We don’t know yet what the impact of this will be as we don’t know how the proposed IPO is going to take shape.”

Aramco is likely to be encouraged by the muted response in bond markets to the attacks. Saudi Arabia’s bond spreads gapped out 20bp across the curve on Monday, a banker said, but buyers bid the bonds back in by 5bp on the day, and a further 5bp by Thursday. “If you looked at where they were trading,” he said, “that kind of widening was pretty material and a lot of people saw this as a rare opportunity.”

The sovereign’s 2025s were trading around 110bp over mid-swaps on Thursday afternoon. The 2030s were around 139bp over and the 2050s were 215bp over.

“Given the huge quantum of bonds outstanding and what happened this week, to be only 10bp wider at the end of it is quite honestly a feather in their cap,” said that syndicate official. “It shows that the Saudi investor base is wide and deep.”

Tadawul ready

All the sources speaking to GlobalCapital this week said that they expected a local listing before any international stock sale. The Tadawul, Saudi Arabia’s main stock exchange, said it was eager to host the listing.

“We are ready,” said Mohammed Sulaiman Al Rumaih, chief of markets at the Tadawul, at the Euromoney conference. “We have made massive changes and upgrades to our system. We are integrated with the international investment community and we have made it easy for international investors to enter the Saudi market.”

“Now a date is set, we know that within 12 months it will happen. When Saudis make a commitment, they stick to it,” said Bader Al-Ghanim, acting CEO at Global Investment House Saudi.

By Francesca Young, Mariam Meskin, Sam Kerr
19 Sep 2019