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Saudi Aramco heads into new waters

It’s official: Saudi Aramco put three billion shares out to the public in the last month of 2019. This share represents one and one-half percent of the state-owned company’s total value. Spearheaded by Crown Prince Mohammad bin Salman, this is a long-awaited endeavor that hopes to eventually achieve a two trillion market cap. With the funds generated from the sale, Saudi Arabia has big plans for the future of its country and economy. 

Within “seconds” of going public on the Saudi exchange in Riyadh, shares rose ten percent, according to the New York Times. The stock closed at $9.50, or 35.2 riyals. At the end of the domestic race to buy-in, the company’s value increased from an estimated $1.5 trillion to $1.87 trillion.

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Recap: This has been a long process

Opening the company to the public is part of the kingdom-wide strategy to diversify the country’s economy; a program called Vision 2030. In order to see innovations from within, the Saudi government invested more than $2 billion into the initial public offering (IPO) of the company. 

In this process, Saudi Aramco hired 20 banks to evaluate the company’s financial wellness and outlook before it went public. The result was not what the government expected, as the company/state hoped to be within the $2-trillion mark. Of the 20, 16 banks found an average of $1.75 trillion in their individual valuations, half of what the crown prince expected. However, not every report came back under margin. Some reported the total work of Saudi Aramco was over the expected amount, settling at around $2.5 trillion, according to Bloomberg.

(Side note: JP Morgan Chase, along with another major banking institution in Switzerland, declined the opportunity to determine the value of Saudi Aramco). 

Saudi Aramco is the crown jewel

The BBC’s Fergus Nicoll and Sameer Hashmi, a BBC correspondent in Dubai, hashed out the details of the deal on the station’s World Record Report. The one and one-half percent sale on the Riyadh stock exchange was a pullback from an original plan to internationally sell five percent and to generate $100 billion from that sale. The regional sale is expected to raise $25 billion. 

When the IPO launched, international money managers (the 20 banks) had concerns about paying premiums and other long-term aspects of the company, according to Hashmi. This conclusion is what led to the sale being regionally focused, though Abu Dhabi, Kuwait, and other countries are supporting the sale. Hashmi reports that the neighboring gulf countries are the “fuel” of the IPO, and is perhaps a test to international backers in the future. For now, though, stock in Saudi Armco is purely regional. 

For the friends of the kingdom that bought shares, Saudi Aramco has agreed to pay $75 billion toward dividends that will be paid out over five years. This was done in anticipation of stock price fluctuation and panic from public investors. 

… and it’s the big kahuna

The Saudi Arabian Oil Company, or Saudi Aramco, produces about one-tenth of the world’s output of oil. Domestic earnings, such as those from Exxon Mobil and Royal Dutch Shell, pale in comparison to Saudi Aramco’s $111 billion net income in 2018. Exxon pulled in roughly $20 billion last year. 

Saudi Arabia controls about 18 percent of the world’s proven petroleum reserves. As an oil-based economy, Forbes has rated Saudi Arabia 51st in its list of 160 best countries to do business in. In the country, the petroleum sector accounts for more than 85 percent of its budget revenue, 42 percent of its Gross Domestic Product, and 90 percent of its export earnings (Forbes, 2019). 

It is the goal of the Saudi Arabian government via its master plan, Vision 2030, to include private investment in the kingdom’s assets. By doing this, it hopes to utilize income from the sale of shares to invigorate other sectors.

The future is betting on Vision 2030

In April of 2016, the Crown Prince announced details of the plan, and the ball was rolled. The Council of Ministers tasked the country’s Council of Economic and Development Affairs to conduct research for what would be required to implement a successful transition in the country’s economy. Behind its pledge to Allah, the second and third pillar of Saudi Arabia’s transformation is to become a global investment powerhouse. It wants to make the kingdom the “epicenter of trade and the gateway to the world” (Saudi Vision 2030). Of its expansive goals in other areas, it plans to leverage its stance in the international oil and invest in developing “adjacent and supporting sectors,” according to the report.

Saudi Arabia expects its energy consumption to increase by 300 percent by 2030. It recognizes the impending need for renewable resources, even facing its plethora of oil, gas, and other natural resources. Within the next ten years, the country pledges to generate at least 9.5 gigawatts of renewable energy from a local market, along with research and development, manufacturing, etc. This will be part of the King Salman Renewable Energy Initiative aimed at new developments and inviting the private sector in on renewable energy investments.

The sale of Amarco shares is, at its heart, a method to diversify the economy. The revenue will be used to fund projects and programs within the state. Some programs have already been implemented. This includes expanding investments into sectors that are not directly related to oil and gas production.

Transferring part ownership of Aramco into the Public Investment Fund of Saudi Arabia is one way the country is looking to enhance the way it invests in development. The Public Investment Fund is a way for the government to divvy up its funds. The benefits of the sale of shares are already proving profitable, as the government savings account is now the largest sovereign wealth fund in the world. This is was not done to compete with private businesses, but to “unlock” new sectors that require extensive capital. It hopes that by 2030, the Public Investment Fund’s assets will increase from 600 billion riyals to more than 7 trillion riyals.

Saudi Arabia is not dropping oil production, though “diversify” may make it sound that way. Broadening the economy includes inviting domestic and international shareholders and focusing funds in other sectors. It does hope to almost double the localization of the oil and gas sector from 40 percent to 75 percent local. Saudi Arabia plans to create a “new city dedicated to energy” by doubling gas production as well as a gas distribution network, the report also stated. 

One plan — of which no real groundwork has been laid — is to invest $500 billion in a  city near the Red Sea, according to Hashmi. This city will be unlike any other in the country if built. Hashmi claims it will be governed by its own set of rules, allow the consumption of alcohol, and be attractive to new business and tourism. Hashmi called it the “ultimate business hub.” If it comes to fruition, the first phase would be completed by 2024. This and other programs are where the IPO funds will be focused, i.e. used as kickstarter money. 

Saudi Arabia, as noted before, is already known around the world as an economic leader, but it hopes to take itself out of the top 20 largest economies. By 2030 it hopes to achieve at least four levels higher ranking: from 19th to 15th. The country is looking to reduce its dependence on oil and build up its other sectors, such as health, education, and tourism. It hopes to achieve its goals by 2030. 

Sources

Best Countries for Business List (2018). “Saudi Arabia” Forbes

https://www.forbes.com/places/saudi-arabia/

Ben Winck (2019). “Saudi Aramco’s IPO raised a record $25.6 billion – but an unusually low 1.5% of the company’s shares will actually trade” Markets Insider 

https://markets.businessinsider.com/news/stocks/saudi-aramco-ipo-less-than-2-percent-shares-publicly-tradable-2019-12-1028752702 

Stanley Reed (2019). “Saudi Aramco Shares Surge in Trading Debut” The New York Times 

Matthew Martin (2019). “Saudi Arabia’s Government Invested Over $2 Billion in Aramco IPO” Bloomberg 

Staff report (2019). “Saudi Aramco analysts’ $1.4 trillion spread risks pleasing nobody” Bloomberg

https://gulfnews.com/business/markets/saudi-aramco-analysts-14-trillion-spread-risks-pleasing-nobody-1.67645969 

Kingdom of Saudi Arabia (2016). Vision 2030 

https://vision2030.gov.sa/en/programs/FSDP 

Fergus Nicoll (2019). “World Business Report: Update: Saudi Aramco up for sale” BBC

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