Aramco expected to be the world’s biggest IPO and could raise up to $100 billion
State energy producer Saudi Aramco, or the Saudi Arabian Oil Company, has selected JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS), and HSBC Holdings PLC as lead underwriters for its planned initial public offering (IPO), as reported by The Wall Street Journal on February 21st, 2017. The listing of Aramco is expected to be the world’s biggest initial public offering and could raise up to $100 billion. The IPO is the centerpiece of the Saudi government’s ambitious plan, known as Vision 2030, to diversify the economy beyond oil. Aramco managed over 260 billion barrels of oil reserves for the Kingdom of Saudi Arabia and pumps almost 10 million barrels a day, far more than private sector competitors such as Exxon Mobil Corp. (NYSE: XOM).
For JPMorgan, Morgan Stanley, and HSBC, participation in a successful IPO also has longer-term implications since it would position them to win additional, future business as the Middle Eastern country continues to seek advice on reshaping its economy. This in turn is expected to force the underwriters to accept lower fees, though they still stand to gain from a windfall of fees because of the offering’s magnitude.
Saudi Aramco has also appointed international law firm White & Case, which has a long-established relationship with the state oil giant, as legal adviser for its IPO. Saudi Arabia is favoring New York to list Saudi Aramco, while also considering London and Toronto, the Wall Street Journal reported. The oil giant also held discussions with the Singapore Exchange regarding a potential secondary listing.
Saudi authorities are aiming to list up to 5% of the world’s largest oil producer on both the Saudi stock exchange in Riyadh, the Tadawul, and on one or more international markets. Aramco received proposals from at least six banks for an advisory role on the IPO. Local and major international banks including Morgan Stanley, HSBC and Citigroup Inc. (NYSE: C) were among those asked to pitch for an advisory position with Aramco. Aramco recently chose boutique investment bank Moelis & Co (NYSE: MC) as an adviser.
Aramco’s IPO would likely occur in 2018. However, complications in the restructuring process of Aramco and disentangling its finances from the government could delay the IPO until 2019, according to The Wall Street Journal. Saudi Arabia is considering two options for the shape of Aramco when it sells shares in the national oil giant next year: either a global industrial conglomerate or a specialized international oil company. Much of the money raised by the IPO would go to the country’s sovereign-wealth fund, which would use it to diversify the kingdom’s economy through investments.
Vision 2030 plan
Saudi Arabia is going through an economic resurrection to reduce dependence on oil production and achieve diversification as part of its long-term growth strategy, named the Vision 2030 plan. The brainchild of Deputy Crown Prince Mohammed bin Salman, the son of King Salman, the plan aims to reduce fuel and utility subsidies. Also part of the Vision 2030 plan is the sale of as much as 5% stake in Saudi Aramco. With the company worth about $2 trillion, according to estimates from the prince, the share sale would be the worlds’ largest initial public offering.
Saudi Arabia’s economy, which is predominantly fueled by oil revenue, is faced with a crisis owing to stunted public sector growth, leading economists to predict a whopping $87 billion deficit in 2016. In 2016, the International Monetary Fund expects the budget deficit to narrow to about 13% of the country’s GDP and below 10% in 2017. To narrow its ballooning budget deficit, Saudi is planning to sell its first international bonds.
Aramco aims to reduce crude burn
Saudi Arabia, the largest crude producer and exporter among the Organization of Petroleum Exporting Countries (OPEC), is turning to renewable energy to generate most of its power supply domestically, thereby helping it to export more crude oil and generate more revenue. Saudi Aramco is driving the country’s first steps toward the renewable energy industry. At Dhahran, Saudi Aramco runs the country’s biggest solar plant, a 10-megawatt facility mounted on a parking lot roof. The solar panels atop the parking facility cut the need for the equivalent of about 30,000 barrels of oil and the wind turbines will eliminate demand for about 19,000 barrels, according to Aramco. In January 2017, it started the kingdom’s first commercial wind turbine to power a facility in the northwest region.
Saudi Aramco will bring online the similar-sized Fadhili gas project in the country’s east by the end of the decade. That gas project and the renewable projects planned for completion by 2023 could save about 300,000 barrels of oil from being burnt for power, according to estimates based on International Energy Agency (IEA) and OPEC data. Improving the country’s energy efficiency by just 4% a year could save about 1 million bpd of crude by 2030, helping the country generate more revenue for its economy and thereby reduce budgetary deficits.