Saudi Arabia may only sell 2% of Aramco. It could still be the biggest IPO on record

Delayed by a year, Saudi Arabia now looks ready to push ahead with a partial privatization of its giant oil company in the coming weeks. The deal under discussion is smaller than previously touted,but could still turn out to be the biggest IPO on record.

Though official details have not been announced, analysts expect that Saudi Arabia will list between 1% and 2% of Saudi Aramco onthe Tadawul exchange in Riyadh by the end of the year. An international listing, possibly in Tokyo, could follow in 2020 or 2021.

Splitting the IPO into phases is a departure from the original plan for a market debut in 2018. Then, Saudi Arabia was expected to float 5% of the company, raising as much as $100 billion. It was looking at international markets such as New York or London, as well as Riyadh.

“We’re talking about a much smaller stake sold in the Saudi market,” said Ayham Kamel, the Middle East and North Africa practice head at Eurasia Group, a political risk consultancy.

Estimates of how much the flotation will raise still vary widely. Crown Prince Mohammed bin Salman reportedly wants the deal to value Aramco at $2 trillion; analysts peg it no higher than $1.5 trillion. Selling 1% at the bottom of that range would fetch $15 billion, while selling 2% at the top could generate $40 billion, eclipsing the record $25 billion raised by Alibaba (BABA) in 2014.

Saudi Aramco declined to comment. CEO Amin Nasser, who did not provide fresh details when speaking at an oil industry conference in London on Wednesday, told CNN’s John Defterios last month that the timing of the IPO and the venue “is a government decision.”

‘Accelerated timeline’

Aramco has indicated in recent weeks that it’s moving full steam ahead on an initial public offering, reviving a deal that had been shelved due to potential legal complications in the United States and doubts about the valuation sought by bin Salman.

The company announced last week that it plans to pay out an annual dividendof $75 billion between 2020 and 2024. It also amended the structure for royalties paid out to the Saudi government. These moves are an attempt to drum up excitement among investors, Kamel said.

Last month, former energy minister Khalid Al-Falih was replaced as Aramco chairman by Yasir Al Rumayyan, who heads up Saudi Arabia’s Public Investment Fund and is seen as more sympathetic to bin Salman’s ambitions for the IPO.

Aramco is the world’s most profitable company, with vast oil reserves and massive daily output. It holds a monopoly in Saudi Arabia, the world’s largest exporter of crude oil.

Smoke billows from an Aramco oil facility in Abqaiq about 60km (37 miles) southwest of Dhahran in Saudi Arabia's eastern province on September 14, 2019. - Drone attacks sparked fires at two Saudi Aramco oil facilities early today, the interior ministry said, in the latest assault on the state-owned energy giant as it prepares for a much-anticipated stock listing. Yemen's Iran-aligned Huthi rebels claimed the drone attacks, according to the group's Al-Masirah television.

Related article Why last week's attack could strengthen Saudi Aramco

Attacks on Saudi oil facilities in mid-September have not derailed the IPO process. In fact, they’ve likely hardened bin Salman’s resolve to get some kind of listing done soon.

“This is why we’re seeing an accelerated timeline,” said Kamel, who thinks the official announcement could be timed to coincide with a big investment conference in Riyadh later this month.

Butthere are risks to a smaller domestic listing. There’s still plenty of skepticism about valuing the company close to $2 trillion. For comparison,Microsoft (MSFT), the world’s most valuable public company, is valued close to $1 trillion.

It’s also not clear to what extent investors will demand to be compensated for continued geopolitical risk.

“The successful attack surely forces a reappraisal [of] the risk to, and the cost of, preserving the physical security of these assets,” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer, an investment bank focused on developing markets.

For investors, the consistency of Saudi output will likely outweigh geopolitical fears, Tellimer’s Malik said. And it doesn’t hurt that the Saudi government is reportedlycourting powerful anchor investors, including wealthy Gulf families, domestic pension funds and regional sovereign wealth funds.

The big issue in a domestic listing is that even a 1% stake of Aramco could overwhelm the country’s benchmark exchange.

“One risk of a domestic listing is that it might push down the valuation of other listed stocks as available liquidity is limited,” said Steffen Hertog, an expert on Gulf politics at the London School of Economics.

Going international

For bin Salman, a successful domestic listing would still be a win, helping to fund his Vision 2030 plan that aims to wean Saudi Arabiaoff oil and develop other areas of the economy.But it’s the prospective international debut that drives the most excitement among investors. And that type of listing looks much more difficult.

Saudi Arabia has taken steps to address concerns about transparency as part of its effort to court global investors. Details about the company’s finances were released ahead of a bond sale earlier this year, and Aramco held its first earnings call this past summer.

“The firm has gone a long way in disclosing its assets, cost and revenue structure,” said Hertog. “There needs to be more disclosure for an IPO, but they have been preparing for this for more than two years.”

The valuation question, however, is likely to keep cropping up.

“A lot of foreign investors still think $2 trillion could look a bit pricy,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB).

Other risks include the potential for reduced oil consumption due to concerns about climate change, and questions about the leadership of bin Salman. The crown prince’s standing on the international stage has suffered since the murder last year of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul.

At the same time, slowing global economic growth has injected significant volatility into markets, muddying the outlook into 2020 and 2021, when an international flotation would likely take place.

But if Aramco can get the pricing right, it should be able to withstand the shaky environment, according to ADCB’s Malik.

“Aramco’s fundamentals even in a lower oil price environment are very, very strong,” she said. “They’ve got strong cash flow [and] the dividend remains very attractive.”