Saudi Aramco topped the $2 trillion target sought by Saudi leader Crown Prince Mohammed bin Salman on Thursday as its shares clocked up a second day of gains, defying some scepticism about the state-owned oil firm’s long-term value.
The Saudi Crown Prince has made Aramco’s initial public offering (IPO) the centerpiece of his vision of diversifying the Kingdom’s economy away from its dependence on oil by using the $25.6 billion raised to develop other sectors.
But that is well below his plan in 2016 to raise as much as $100 billion via a blockbuster international and domestic IPO.
Riyadh scaled back its plans after overseas investors baulked at the proposed valuation and only 1.5% of Saudi Arabian Oil Co (Aramco) shares were listed on the Riyadh stock exchange on Wednesday, a tiny free float for such a large company.
While a 10% jump in the stock on its Wednesday market debut was hailed by the Saudi government as a vindication of it long-sought valuation, support was largely from loyal Saudi and Gulf investors, with some analysts saying it is worth less.
Aramco’s listing was front page news for almost all Saudi Arabia’s mainstream media on Thursday, with headlines such as “Aramco at the top of the world” and “A dream come true”.
But Bernstein analysts put Aramco’s value at around $1.36 trillion, which compares with U.S. energy giant Exxon Mobil’s market capitalization of less than $300 billion.
“Saudi Aramco is the largest, most profitable oil company in the world – but size is not everything,” they wrote, flagging the risk of slow net income growth if oil prices stay flat.
An International Energy Agency (IEA) report on Thursday pointed to pressure on oil prices, predicting a sharp rise in global inventories despite an agreement by OPEC and its allies to deepen output cuts as well as lower expected production by the U.S. and other non-OPEC countries.
Bernstein said Aramco should trade at a discount rather than a premium to international oil majors, with corporate governance “the key risk” as the Saudi government owns more than 98% of it.
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“For actively managed funds, one of the key considerations – aside from valuation – will be ESG (environmental, social and corporate governance) criteria,” said Tim Love, Investment Director for emerging markets equities at GAM.
“The main concerns here are lagging corporate governance standards as well as environmental issues since an investment in Aramco would obviously have a significant impact on a portfolio’s CO2 emissions,” Love added.
Aramco, whose shares gained the maximum 10% allowed by the Riyadh exchange on their first day of trading, hit 38.7 riyals ($10.32) on Thursday, before easing to 37.5 riyals, putting its market value at $2 trillion.
“Initial price action has validated our thesis that Aramco discounted its IPO price to leave upside on the table and allow regional investors to benefit from the listing of its crown jewel,” Zachary Cefaratti, CEO of Dubai-based Dalma Capital, which invested in the IPO, said in a note on Thursday.
“The average institutional investor received less than 1/6th of the shares they bid for in the IPO, and have had to buy shares on the open market,” Cefaratti said of the Aramco deal, which became the world’s largest, topping the $25 billion 2014 listing of China’s Alibaba.
INDEX DRIVEN DEMAND
Because Aramco opted to sell a smaller proportion of shares and rely mainly on domestic and regional buyers, some analysts predict a lag before its price settles.
A trader in Riyadh, who asked not to be identified, said that most of the early trading was small scale, of 1,000-1,500 shares, “signaling that some retail investors opted to make quick gains” as they were “happy with a 6 riyal per share gain”.
“We shouldn’t be reading too much into intraday dips. Let’s not forget that more than 93% of the market is still dominated by retail investors, and like in any IPO issuance flippers will exist,” said Aarthi Chandrasekaran, portfolio manager at Abu Dhabi-based Shuaa Capital.
Aramco shares will also join the Tadawul index and global benchmarks such as MSCI and FTSE next week, which analysts said should fuel further demand, particularly from “passive” investors who track such indexes.
A Gulf analyst, who asked not to be identified, said trading by investors in the region could be driven by Saudi Arabia’s own view of the value of Aramco.
“Investors will debate: why should it go higher … while its owners value it at $2 trillion?” the analyst said, adding that when National Commercial Bank listed in 2014 its shares rose by the maximum limit for 10 days before selling set in.