Saudi Arabia’s Crown Prince Mohammed bin Salman was said to be disappointed that Saudi Aramco, the Kingdom’s state oil and gas company, was not valued at $2trn (£1.52trn) in its Initial Public Offering (IPO).
Prince Mohammed will, presumably, therefore have been gratified to see the company’s stock market valuation nudging that sum following its first day of trading.
The golden rule in pricing an IPO is ‘always leave something on the table for the next man’ if you want to see a decent first day premium.
In the case of Saudi Aramco, that was trickier than usual.
Even at the reduced valuation of $1.7trn, the company was priced at a premium, by conventional investment yardsticks, to long-established global oil and gas ‘supermajors’ like Exxon Mobil, Royal Dutch Shell, Chevron, Total and BP, all of whose prospects are well-understood by investors.
As the oil and gas analysts at Jefferies, the stockbroker, pointed out after publication of Saudi Aramco’s prospectus, based on its recent payments to the Saudi government, the company compared unfavourably with the supermajors in terms of its dividend yield.
Foreign investors would also have required a good reason to buy the shares given the corporate governance issues since, under the original plan, the Kingdom would have retained a 95% shareholding.
As a result, with foreign investors balking, the Kingdom had to pull other levers to attract interest in the IPO.
Plans for a secondary listing on a major international stock exchange, such as New York, London or Tokyo, were dropped.
The listing was to take place only on the Tadawul, Saudi Arabia’s home stock market, making it crucial to attract domestic investors.
Wealthy Saudi families were, therefore, encouraged to participate in the IPO.
The Financial Times put it more strongly than that.
It reported in September that the government’s “aim was to ‘strong arm’, ‘coerce’ or ‘bully’ some of the wealthiest families in the Kingdom to become cornerstone investors”.
It added: “Many of the families targeted had members previously imprisoned in Riyadh’s Ritz Carlton hotel in 2017 and 2018, in what the government billed as a crackdown on corruption. Some of the detainees said they were tortured. Most were later freed after they reached financial settlements with the state.”
The Saudi government denied the allegations.
But there is little doubt some wealthy individuals were told it was their ‘patriotic duty’ to invest.
The adviser to one such individual, who was invited to invest up to $100m, told the New York Times: “There is a limit on how patriotic he wants to be.”
The support of such families will lend stability to the aftermarket.
When shares of a company fly to a 10% premium on the first day of trading, a lot of international investors would happily bank their profit and move on, but these families are unlikely to be selling their shares in Aramco in a hurry.
Some commentators have speculated that a broader motive for the Saudi government, in terms of getting wealthy families to invest, was also to bring back to the Kingdom money that some of these families might once have salted offshore, for example, in high-end London properties.
With big local institutional investors and wealthy families already on board, the Kingdom was keen to attract other domestic investors, too. There was a huge promotion for the IPO during the Kingdom’s investment forum – the so-called ‘Davos in the Desert’ event – in October.
Retail investors, ordinary Saudis, were encouraged to invest. They were told, as were the wealthy Saudi families and institutions before them, that it was their patriotic duty to invest.
They were also offered bank loans to help them buy and were also promised that, should they hold their shares for 180 days, they would receive one bonus share for every 10 they own – up to a maximum of 100 more.
This latter tactic, incidentally, is not unique to Saudi Arabia.
Millions of members of Standard Life, the insurer, were promised bonus shares if they kept for more than a year the shares they were allocated when the company demutualised in 2006.
Finally, retail investors were promised a big increase in dividends, with Aramco promising a $75bn pay-out in 2020.
The Saudi government pulled another lever when, last month, it trimmed the stake in Aramco that it was selling from 5% to just 1.5%.
The upshot was that, last week, the company could announce that the issue was oversubscribed.
For every share being sold, investors were prepared to buy 4.7, with that rising to 6.2 for institutional investors.
Ultimately, five million Saudis – one in four of the population – applied for shares, along with some 106,000 expats based in the Kingdom.
These retail investors have been allocated a third of the shares being sold and, given the attraction of getting bonus shares, that too will help lend stability to the aftermarket.
In fact, such was the demand for shares among ordinary Saudis that some small investors got fewer shares than they wanted, just as in the highly successful privatisations carried out by Margaret Thatcher’s government in Britain in the 1980s.
Anyone applying for more than 2,000 shares or more saw their final allotment scaled back, with those applying for 100,000 or more shares only getting 12% of the number they sought.
On that basis, today’s IPO can be judged a success, with Saudi Aramco guaranteed to raise $25.6bn from the issue.
That could rise to as much as $29.4bn should what is known in investment banking jargon as the ‘greenshoe’ – an option entitling underwriters to the issue to release more shares – be exercised.
Yet that is not the end of the story.
At some point, the Saudi government is still expected to seek a secondary listing on an international exchange, not least to highlight the Kingdom’s attractiveness as an investment destination. So the company is going to have to establish a track record of delivering on promises to investors and questions will persist over that valuation.
The stock will, though, have its attractions. Saudi Aramco is an efficient and low-cost producer with a higher return on equity than the supermajors.
And, as Jason Gammel of Jefferies points out, it has another attraction: “Aramco produces 10% of global crude supply and controls spare capacity at around 2% of global demand.
“It’s the only oil producer that can influence price – although its production policy is dictated by the [Saudi government].
“A $1 per barrel change in the price of Brent crude moves Aramco’s cash flow by $1.6bn; a 100,000 barrel per day movement in crude production moves Aramco’s cash flow by $925m.”
Yet there is a downside to that, as well, as it means that, more than any other oil company, Saudi Aramco is a bet on the oil price.
Accordingly, if the world moves away from fossil fuels more rapidly than expected, that will eventually reduce the attractiveness of the shares.