Written by Mark Thomas
18 December, 2019
Does the world’s largest IPO signal the top of the oil market as the world turns to alternate energy?
Much has been written about the $US2 trillion world record IPO of Aramco. However, the motivation of the Saudi state to list remains uncertain.
Electric cars are estimated to use one third of the energy of internal combustion cars powered by oil. Furthermore, by even the most optimistic estimates of electric car sales, electricity generation would only increase by 5 percent. We can see this in the below info graph provided by Nucleus Wealth.
So why sell out of oil?
One driver may be that their significant reserves (90 years) could become less valuable. In a world that is turning to alternate energy and shifting towards electric vehicles, oil demand would fall and electricity demand would rise. As a result, the Saudis have signalled that they intend to sell more of the company over the next few years.
The share market debut of Saudi state-owned Aramco raised $US25.6 billion for the Saudi state and valued the company at $US1.7 trillion (trading as high as $US 2 trillion in the first week). The Saudi state retains ownership of 98.5 percent of the company with only 1.5 percent being offered to the public via the local Tadawul (Saudi) stock exchange.
The point of the IPO was to diversify the Saudi economy away from its dependence on oil. The cash generated by the sale of Aramco equity will go to the Public Investment Fund (PIF), the Saudi sovereign wealth fund, which invests it in projects unrelated to oil.
How big is this IPO in comparison?
Aramco has 10 times the reserves of its next biggest oil competitor ExxonMobile and profits of circa $US70 billion, some 14.5 percent higher than the largest listed company in the world – Apple Inc.
The float was originally to be 5 percent of the company but was scaled back to 1.5 percent, making the free float tiny in comparison to Apple Inc. (88 percent). According to The Guardian:
“One can speculate on the reasons for the tepid demand from outside the region. Revulsion at the killing of the journalist Jamal Khashoggi in the Saudi consulate in Istanbul in October last year? Worries about Aramco’s governance? Concern about attacks on refineries? Or a fundamental difference of opinion about valuation given that shares in BP, Shell, Chevron and Exxon offer higher dividend yields? Probably all of the above.”
A new chapter for the Saudi state
The Crown Prince has suggested that up to 10 percent could be sold in the future and raise a further $100 billion. They have also mooted that over the long-term a majority of Aramco stock could be sold to outside investors. A listing on the London stock exchange sounds likely as the size of the capital raising would need access to bigger stock markets.
More importantly, the IPO signals the beginning of the new chapter for the Saudi state and their dependence on oil. An inevitable shift if they are to survive in a changing world.