Appetite high for Aramco’s $10bn second listing

Vijay Valecha, Arabian Gulf Business Insight, Feb 5, 2024

Now is the right time for the Saudi state oil company Aramco to follow through on its much-anticipated second share listing, industry experts have said.

Observers believe that growing international investor appetite for the region’s stock markets makes the timing attractive.

However, geopolitical regional tensions, concerns about global oil demand, and high interest rates could also weigh on the listing.

Saudi Aramco is considering raising around SAR40 billion ($10 billion) on the Riyadh stock exchange, as early as this month, according to Bloomberg sources. 

The proceeds would be transferred to the kingdom’s sovereign wealth fund to finance the diversification of the local economy.

The Saudi government holds about 90 percent of Aramco, and the Public Investment Fund owns a further 8 percent.

The oil company, the world’s biggest oil exporter and worth around $2 trillion, raised $30 billion in an initial public offering of 1.5 percent of shares four years ago and planned to sell shares worth up to $50 billion in 2022, but waited for favourable market conditions.

“Market conditions are better,” Vijay Valecha, Century Financial’s chief investment officer, told AGBI.

GCC countries raised $6.8 billion through 29 offerings during the first nine months of 2023, with the figure boosted by a flurry of IPOs in Saudi Arabia, a privatisation push in Dubai, and several record-breaking listings from state-owned energy providers in Abu Dhabi.

Hazem Ben-Gacem, co-chief executive officer at Investcorp Holdings, said: “It’s so good to see the government entities playing an active role in introducing high-quality businesses to the market.”

According to Valecha, Aramco’s positive performance over 2022 and 2023 would make it appealing to investors seeking stable and consistent returns: “Aramco’s share price outpaced competitors like BP and Shell, reflecting strong investor confidence.”

The company’s year-end market cap increased to SAR 2.30 trillion ($611 billion), marking growth of more than 13 percent in 2023, after an increase of more than seven percent in 2022.

Julien Lafargue, chief market strategist at Barclays Private Bank, said international investors are increasingly considering opportunities in Gulf markets. 

“There is clearly very significant interest in being exposed to the growth that this region has to offer,” Lafargue told AGBI last week.

However, George Khoury, the Dubai-based global head of education and research at the forex broker CFI, said he believed that the uncertainty around the direction of oil prices could affect investors’ appetite for such an operation. 

“The decision to limit production capacity sent a pessimistic signal regarding demand expectation,” he said.

However, Khoury said, the savings from Aramco’s recent decision to abandon the production capacity expansion could bolster the company’s ability to distribute dividends.

Valecha said the government’s positive foreign direct investment trends and ambitious projects signal growth potential in Saudi Arabia, which will positively influence Aramco.

FDI in Saudi Arabia reached $2.93 billion in the third quarter of 2023, a 60 percent increase compared with the third quarter of 2022.

Saudi Arabia’s position among the top six most attractive emerging markets FDI destinations, according to the Kearney FDI Confidence Index, underscores its appeal to international investors, Valecha said.

Aramco’s substantial size and prominence can elevate the profile of the Tadawul stock exchange, drawing increased attention from global investors.

“The IPO contributed to a positive sentiment in global markets, bolstering investor confidence in the region and recognising Aramco’s potential growth,” Valecha said.

After a 14 percent gain in 2023, the Saudi stock market has taken a relatively negative direction since the beginning of the year.

Khoury said: “The sale could help bolster trading activity. Increased interest and liquidity could benefit the market and favour more positive performances.”

Shakeel Sarwar, a Bahrain-based head of asset management equities at Sico Bank, was more pessimistic and said appetite for an Aramco listing would be low, due to the weakened global economic outlook and the oversupply of oil and concerns over the accuracy of the oil giant’s valuation.

“In a world where ESG concerns are increasing, it becomes more and more difficult to sell the largest oil company in the world.

“Also, given the current market environment, the valuations look stretched. However, these concerns can be alleviated by Aramco by offering sweeteners in the deal.”

Source

Arabian Gulf Business Insight