Skip to main content

Energy giant Saudi Aramco's market value soared above $2 trillion on Thursday.

FAYEZ NURELDINE/AFP/Getty Images

Saudi Aramco hit the US$2-trillion target sought by de facto Saudi leader Crown Prince Mohammed bin Salman on Thursday as its shares racked up a second day of gains, despite some skepticism about the state-owned oil firm’s value.

Aramco’s initial public offering (IPO) is the centerpiece of the Saudi crown prince’s vision for diversifying the kingdom away from its oil dependence by using the US$25.6-billion raised to develop other industries.

But that is well below his 2016 plan to raise as much as US$100-billion via a blockbuster international and domestic IPO.

Story continues below advertisement

Riyadh scaled back its ambitions after overseas investors balked at the proposed valuation and only 1.5 per cent of Saudi Arabian Oil Co (Aramco) shares were listed on the Riyadh stock exchange on Wednesday, a tiny free float for such a huge company.

Aramco shares hit 38.7 riyals (US$10.32), lifting its market value above US$2-trillion and closed at 36.8 riyals, a rise of 4.5 per cent from Wednesday’s close and valuing the company at US$1.96-trillion, Refinitiv data showed.

While a 10 per cent jump in the stock on its debut, the maximum allowed by the Riyadh exchange, was hailed by the Saudi government as a vindication, support was largely from loyal Saudi and Gulf rather than overseas investors.

The IPO was front page news in mainstream Saudi media, 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 US$1.36-trillion, which compares with U.S. energy giant Exxon Mobil’s market capitalization of less than US$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 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.

Story continues below advertisement

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 per cent of it.

“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.

Some 15.9 billion riyals worth of Aramco shares were traded by the close, with around 417.7 million shares exchanging hands, Refinitiv data showed. This made up most of the total turnover of the whole Riyadh market which was 18.5 billion riyals.

“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,” Mr. Cefaratti said of the Aramco deal, which became the world’s largest, topping the US$25-billion 2014 listing of China’s Alibaba.

TAKING GAINS

The successful completion of the IPO has also led to a strengthening of Aramco’s dollar bonds, which are now trading at yields closer to Saudi Arabia’s sovereign debt.

Story continues below advertisement

“It makes sense for Aramco to trade level with the sovereign, as Saudi Arabia’s economic is still so dependent on oil, but the goodwill from the IPO has certainly helped,” one banker who worked on the Aramco bond issue said.

For its shares, Aramco’s decision to sell a smaller proportion of its equity and rely mainly on domestic and regional buyers, means some analysts predict a lag before they settle.

Most of the early trading was small scale, of 1,000-1,500 shares, a trader in Riyadh, who asked not to be identified, said, adding this signaled that some retail investors were “happy with a 6 riyal per share gain.”

Aarthi Chandrasekaran, portfolio manager at Abu Dhabi-based Shuaa Capital, said it was too early to draw conclusions.

“We shouldn’t be reading too much into intraday dips. Let’s not forget that more than 93 per cent of the market is still dominated by retail investors, and like in any IPO issuance flippers will exist,” Ms. Chandrasekaran said.

Another trader said that Saudi investors are reluctant to leave their money in the market ahead of the weekend as many lost millions when global markets collapsed over the weekend during the financial crisis and they were unable to exit.

Story continues below advertisement

Aramco shares will also join the Tadawul index and global benchmarks such as MSCI and FTSE next week, which analysts said should fuel demand, particularly from “passive” investors.

A Gulf analyst, who asked not to be identified, said investors could be driven by Riyadh’s own valuation view.

“Investors will debate: why should it go higher ... while its owners value it at [US]$2-trillion?” he said.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies