Saudi Aramco IPO Unlikely Despite Big Profits

Aramco IPO may be delayed but it is offering up bonds and received its first-ever ratings from Fitch and Moody's.

Saudi Arabia’s state oil company, Aramco, emerged this week as the world’s most profitable company by far, with $111 billion of earnings in 2018, but the end could be near for the kingdom’s highly anticipated public offering (IPO)of a 5% stake in the company, already postponed until 2021 at the earliest.

The recent announcement that Aramco has reached a deal to acquire a 70% stake in Saudi petrochemical company, SABIC, adds to the reasons to believe that a proposed IPOof Aramco is “going nowhere quickly,” according to Jason Tuvey, senior emerging markets economist at Capital Economics in London.

The main rationale for such a massive IPO would be to secure funds for the kingdom’s sovereign wealth fund—the Public Investment Fund (PIF)—to move forward with its international investments, Tuvey says. “The key point here is that Aramco is purchasing the stake in SABIC from the PIF,” he says. “And the proceeds from this deal [$69.1 billion] are similar in size to that which the PIF would have received (via the government) if the Aramco IPO had been pushed through,” he adds.

Tuvey says one of the key factors that has held up the IPO is Crown Prince Mohammed bin Salman’s insistence that the company achieve a valuation of $2 trillion. Financial information released by Saudi Arabia this week, in a prospectus for a proposed bond sale of about $10 billion to help fund the SABIC deal, led analysts to put a value on Aramco of about $1.5 trillion, assuming oil prices around $70 a barrel.

The prospectus—which was filed with the London Stock Exchange where the Aramco bonds will be listed—showed that Aramco does not generate as much cash as other leading oil companies because of its heavy tax burden. The company pays a 50% income tax on its profit, plus royalties on a sliding scale that starts at 20% of revenue and rises with the price of oil.

The Aramco bonds will not be registered with the US Securities and Exchange Commission, but they may be offered and sold in the US to qualified institutional buyers. The 470-page “base prospectus” is for a global medium-term loan program. While the first bonds will be denominated in dollars, future issues could be in other currencies, including the renminbi, which is not fully convertible and is subject to Chinese government restrictions on remittances into and out of the country.

In their first-ever ratings for Aramco, Fitch Ratings issued the company an A+rating, while Moody’s Investors Service gave it an A1rating. Both ratings are the fifth-highest investment grade. The ratings were limited by Aramco’s close ties to the Saudi government.

J.P. Morgan and Morgan Stanley were listed as arrangers and dealers for the term note program. Other dealers listed were Citi, Goldman Sachs International, HSBC and NCB Capital of Saudi Arabia.

According to the prospectus, Aramco says it believes that purchasing a majority interest in SABIC will advance its strategy to increase the proportion of petrochemicals production in its downstream portfolio and capture additional value.