Saudi Aramco
shares spiked 10% on Wednesday soon after the company started trading
its shares publicly for the first time. That's the daily limit on the
exchange.
The surge in share price means the company is now worth $1.9 trillion.
That massive market capitalization dwarfs giant publicly listed Goliaths like Apple and Alphabet.
Crown Prince Mohammad bin Salman had been seeking a valuation of $2 trillion.
Saudi Aramco shares spiked 10% on Wednesday on their first day of trading publicly on the Tadawul exchange.
The surge hit the exchange's daily limit and means the company, which
earlier this week was valued at $1.7 trillion after raising $25.6
billion in its initial public offering, is now worth a whopping $1.9
trillion. That dwarfs the market capitalizations of the biggest US
giants, including Microsoft, Apple, and Google's parent, Alphabet.
Crown Prince Mohammad bin Salman had been seeking a valuation of $2
trillion for the state-owned oil giant, whose public offering was meant
to help finance his Vision 2030 plan of diversifying the Saudi economy
away from oil.
According to The Wall Street Journal, Saudi officials had been
pushing for the country's wealthy to buy shares in the company when it
went public, and according to the Financial Times, that was happening until Tuesday evening.
RIYADH (Reuters) - The proceeds from Saudi Aramco’s record initial
public offering have risen to $29.4 billion after the oil company
exercised an option to sell 15% more stock, an executive at one of the
banks leading the deal told Al Arabiya news channel on Monday.
Wassim Al Khatib, head of investment banking at the investment arm of Saudi Arabia’s biggest bank, National Commercial Bank (1180.SE), said the state-controlled oil giant had exercised the so-called over-allotment option.
Aramco’s main IPO raised $25.6 billion on Thursday.
“The final number of shares sold is 3.450 billion shares, and the final value of the deal is $29.4 billion,” Khatib said.
Aramco is listing its shares on Wednesday on the Saudi exchange after completing the largest IPO on record.
Reporting by Marwa Rashad and Davide Barbuscia, Editing by Louise Heavens and Mark Potter
Crown
Prince Mohammed bin Salman said in 2016 that Aramco, Saudi Arabia’s
national oil company, would have a $2 trillion valuation.Credit...Tasneem Alsultan for The New York Times
As investors balked, some bankers and Saudi officials still hoped to
achieve the crown prince’s target price of $2 trillion. They wound up
settling for less.
Early on Oct. 15,
a group of international investment bankers delivered some unwelcome
news to top executives of Saudi Arabia’s giant oil company, Saudi
Aramco.
The bankers, gathered at
Aramco’s headquarters in Dhahran, reported that global investors weren’t
as bullish on the company’s initial public offering of stock as the
officials had expected, said two people who were in the room and three
who were briefed on the meeting. That meant Aramco appeared unlikely to
reach the $2 trillion valuation wanted by Saudi Arabia’s crown prince,
Mohammed bin Salman.
Instead, a banker
from JPMorgan Chase, presenting on behalf of the group, explained that
investors viewed Aramco as worth $1.1 trillion to $1.7 trillion.
Aramco
executives, who hadn’t seen the news coming, were angry. Saudi Arabia
was counting on the I.P.O. to attract foreign investment to help
diversify its economy away from oil. An Aramco I.P.O. valuation reduced
by forecasts of weakening global demand for oil and geopolitical jitters
could hurt that effort.
On Thursday, Saudi Aramco priced the I.P.O
at 32 riyals, or $8.53, a share, valuing the company at $1.7 trillion.
The offering is expected to raise $25.6 billion — a fraction of the $100
billion that Prince Mohammed originally imagined. The company’s shares
are set to begin trading Wednesday on Saudi’s stock exchange, known as
the Tadawul.
The result was not what
Saudi officials had in mind. Rather than being listed in New York or
London, shares of Aramco are being sold primarily to investors in Saudi
Arabia and in neighboring countries. Some of the international banks
hired to underwrite the deal have instead taken on secondary roles, with
the I.P.O. share sales being overseen by two Saudi banks and the
British bank HSBC.
“The Aramco I.P.O. was meant to be Saudi
Arabia’s debut ball to global investors,” said Karen Young, a resident
scholar at the American Enterprise Institute. “Instead, it will be more
of a family reunion.”
According to
interviews with a dozen underwriters, strategists and others briefed on
the I.P.O., who spoke on the condition of anonymity to discuss
confidential negotiations, Aramco’s journey from private to public
company was an unwieldy and at times fractious deal-making process. It
involved 25 banks, three financial advisers, numerous Aramco company
officials, at least two Saudi government committees and the crown prince
himself.
The idea to sell shares in state-owned Aramco, the world’s most profitable company, which for decades has been an engine of the Saudi economy, was foundational
to Prince Mohammed’s Vision 2030 plan to modernize that economy.
Released in 2016, that blueprint helped vault Prince Mohammed, then the
deputy crown prince, to become the heir apparent to his father, King
Salman. JPMorgan, Morgan Stanley and HSBC were brought in to start the
long process of preparing the company for sale to public investors.
The I.P.O. was initially proposed to take place in 2018, but then shelved
amid concerns over how highly the company would be valued and where it
should list its shares. That year also saw Prince Mohammed come under
global condemnation after the brutal killing of Jamal Khashoggi, a
Washington Post columnist, by Saudi agents in Istanbul. Western
intelligence agencies linked the crown prince to the killing, but he has
denied involvement.
Then, this year, plans for the I.P.O. were revived.
Over
two days of meetings on Sept. 3 and 4, international banks gathered in
Aramco’s London offices to pitch the company for roles on the I.P.O.
underwriting team.
Many of the banks
said they envisioned situations where the company could be worth $2
trillion or more, said four people who attended the meeting, another
three who were briefed on it and documents reviewed by The New York
Times. Bank of America’s estimates reached $2.5 trillion on the high
end, these people added; JPMorgan’s drifted as low as $1.4 trillion,
according to the documents and two people with knowledge of their
presentation.
Around the same time, Prince Mohammed installed Yasir al-Rumayyan,
a close confidant who favored the $2 trillion valuation, as Aramco
chairman, replacing Khalid al-Falih, a former Aramco chief executive
with an engineering background. Mr. al-Rumayyan, the powerful governor
of the kingdom’s $320 billion Public Investment Fund, had discussed the
plans with bank officials over the summer.
Then on Sept. 14, on its path to going public, Aramco was jarred by an aerial attack on its production facilities,
blamed on Iran, that temporarily cut its oil output in half. The attack
underscored the risk of operating in the Middle East, but it did not
deter the march to an I.P.O.
Deal makers soon
fanned out over Asia, Europe and North America to gauge interest in
Aramco by Fidelity Investments, Capital Group, BlackRock and other major
investors. To make Aramco more attractive, the banks persuaded it to
establish an enormous investor dividend, or annual payout — $75 billion a
year.
But in meetings with roughly
80 mutual funds, hedge funds and sovereign wealth funds, underwriters
and investors said, potential buyers balked at the $2 trillion
valuation, which struck them as too high relative to other major oil
companies and in light of low oil prices, climate-change concerns and
other geopolitical pressures.
“We felt
that a valuation in the range of $1.2 to $1.3 trillion would represent
fair value,” or a reasonable price, “but it would need to I.P.O. at less
than that to offer decent upside,” or investor profit potential, said
Tal Lomnitzer, a portfolio manager at the fund company Janus Henderson
who participated in the early investor discussions.
His
was in some ways the typical buyer’s position at the onset of a
negotiation: to argue for the lowest price in hopes of making money on
the purchase if Aramco shares went up in public-market trading. But
given the wide gap between views like Mr. Lomnitzer’s and the Saudi
government’s $2 trillion expectations, some of the bankers were
concerned.
Then came the meeting on
Oct. 15 at Aramco’s headquarters in Dhahran on the kingdom’s Persian
Gulf coast, and one that would follow the next day. Of all the crucial
moments in the lead-up to the I.P.O., these gatherings may have been the
most tense, according to four people who either attended the meetings
or were briefed afterward. It was then that some of the bankers —
motivated by the promise of enormous fees for evaluating the oil
company’s investment potential and then selling shares to respected
investors — clashed with kingdom officials and other advisers who were
fixating on an increasingly elusive $2 trillion deal.
The
banks, who had been sizing up investor demand for the I.P.O., delivered
their findings to Amin H. Nasser, Aramco’s chief executive. Mr. Nasser
was angry and taken aback by the news,said
two people who were in the room and three others briefed on it later.
He pointed out that some of the bankers had promised an Aramco valuation
of even more than $2 trillion, and that his company had curbed spending
plans and made other changes to accommodate the $75 billion dividend.
After the tense exchange, the bankers piled into cars and drove four
hours across the desert to Riyadh to explain their reports, one by one,
to Mr. al-Rumayyan, the Aramco chairman, said two of the people who were
on the trip.
Mr. al-Rumayyan
was also deeply unhappy. During the JPMorgan group’s presentation,
according to four people with knowledge of the meeting,he
criticized them for talking the valuation down. By the next day, Oct.
16, when the banking syndicate met to regroup, two camps had emerged:
Citigroup, Goldman Sachs and Bank of America said that until they could
share additional research on Aramco’s finances and hold more detailed
conversations with potential buyers, they could not determine what price
investors would truly be willing to pay, said three people who were
part of the discussion and three who were briefed on it later.
Bankers
from Morgan Stanley and JPMorgan, who had been working on the deal for
years, were skeptical that investors would be willing to pay much more
than they were already suggesting. The bankers argued that Saudi
officials in charge of the I.P.O. should be given more details on why
investors were cooler to the deal than expected. Underscoring that
point, said three people who were there, was Franck Petitgas, head of
Morgan Stanley’s international division, who asked how the underwriters
could, in good conscience, not share the dozens of investor comments the
bankers received in their initial meetings. (Through a spokesman, Mr.
Petitgas declined to comment.)
Michael Klein, a New York investment banker who was hiredto
advise Aramco, urged the more forward-looking approach. After another
meeting with the bankers, a Saudi I.P.O. committee opted to delay the
deal to hold additional investor discussions.
Aramco
decided to carry on and on Nov. 3 issued its formal plan to go public.
Its prospectus reported enormous profit — $68 billion for the first nine
months of the year. But there were also caveats: Those earnings were
down 18 percent from the year before, and risk factors to investing in
the I.P.O. ranged from concerns over the impact of fossil fuels to the
possibility of terrorist attacks.
The
banks talked with investors, but their prices didn’t fundamentally
change; at meetings held Nov. 15 and Nov. 16 with Mr. al-Rumayyan in
Riyadh, banks reported that foreign investors were still valuing Aramco
somewhere between $1.3 trillion and $1.8 trillion, according to two
people who were there.
Faced with
that, the kingdom abruptly canceled a series of more formal investor
meetings in Asia, Europe and North America. It relegated most of the
American banks to lesser roles and refocused on the plans for a domestic
listing.
In
the run-up to the I.P.O., interest in Aramco shares in Saudi Arabia
appeared strong, buoyed by a substantial marketing campaign and
low-interest-rate loans for stock purchases.
Hussam
A. al-Saleh, a financial adviser based in Riyadh, predicted last month
that most of his Saudi clients would wind up buying shares. Some of the
interest stemmed from Aramco’s reputation in the kingdom as a classic
stock, he said: “People believe in the company.”
And for the Saudi leadership, the pursuit of a $2 trillion valuation continues.
“It
will be higher than the $2 trillion. I can bet that this will happen,”
said Prince Abdulaziz bin Salman, the Saudi energy minister, who is the
half brother of Prince Mohammed, speaking Friday at an OPEC news
conference.
“It is the proudest day
for Prince Mohammed to celebrate,” he said, referring to the offering.
“We kept it to our family and friends.”
Kate
Kelly is a reporter in the Business section, where she covers big
banks, trading and lending, and the crucial players setting financial
policy in both politics and business. She is also the author with Robin
Pogrebin of "The Education of Brett Kavanaugh: An Investigation." @katekelly
Stanley
Reed has been writing from London for The Times since 2012 on energy,
the environment and the Middle East. Prior to that he was London bureau
chief for BusinessWeek magazine. @stanleyreed12•Facebook
A version of this article appears in print on , Section B, Page 1 of the New York edition with the headline: A $2 Trillion Wish That the Markets Just Couldn’t Grant. Order Reprints | Today’s Paper | Subscribe
An OPEC branded flag sits on a table ahead of the 169th Organization of
Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on
Thursday, June 2, 2016. Saudi Arabia is ready to consider a surprise
deal with fellow OPEC members, attempting to mend divisions that had
grown so wide many dubbed the group as good as dead. Photographer: Akos
Stiller/Bloomberg via Getty Images
Oil whipsawed on Thursday as traders awaited the decision from OPEC on its production policy.
Ahead
of the meeting in Vienna Russian energy minister Alexander Novak said
that OPEC+ was discussing a larger-than-expected 500,000 barrel a day
production cut for the first quarter of 2020.
But oil gave back its gains after Novak also said to Bloomberg that the deeper cuts would only be implemented if each member complies with its current production quota.
Ahead
of Thursday’s meeting, Iraq said that it was pushing for a 400,000
barrel a day production cut on top of the existing agreement for cuts of
1.2 million barrels per day.
Helima Croft, RBC head of global
commodities strategy, said to CNBC ahead of the meeting that it was her
understanding that a larger cut has the support of the OPEC core
operating group, as well as its partner Russia.
24-country OPEC+
has cut output by 1.2 million barrels per day since the beginning of the
year, and the current deal runs through March of 2020. Production cuts
were first implemented in January of 2017 in an attempt to bolster
prices as the U.S. kicked up its shale oil production, among other
things.
As the meeting kicked off reports conflicted over who proposed the cuts. WTI briefly sold off after CNBC reported
that one senior Saudi oil official denied pursuing a deeper round of
production cuts. On Monday Reuters had previously reported that Saudi
Arabia could be in favor of deeper cuts in order to give Aramco a boost
as it hit the public market.
Also in focus will be individual
country’s production output. Again Capital’s John Kilduff said that he
believes Saudi Arabia is “open” to a cut, but that the most important
thing to the nation is that country’s comply with the quotas that are
currently in place.
This is the first meeting with the new Saudi
energy minister, Prince Abdul Aziz bin Salman, who is the son of the
King and half-brother to Crown Prince Mohammed bin Salman.
Azeri oil workers operate a large field of drilling rigs on October 12, 2003 outside the capital city of Baku, Azerbaijan. Oleg Nikishin | Getty Images
Oil gained on Wednesday ahead of an expected
extension to production curbs by OPEC and its allies, with further
support from industry data showing a larger than forecast drop in U.S.
crude stockpiles.
The
Organization of the Petroleum Exporting Countries (OPEC) and allies
that include Russia - a group known as OPEC+ - could approve deeper
crude output cuts when they meet in Vienna this week.
Iraqi oil
minister Thamer Ghadhban told reporters in Vienna on Tuesday that “a
deeper cut is being preferred by a number of key members.”
There
is still some market skepticism over a deepening of cuts, though it is
accepted that the producer group is keen to support prices, with many
analysts expecting an extension of the existing supply pact.
“Amid
(the) trade war uncertainty, OPEC will be even more determined to
maintain a floor on oil prices and will work to deliver precisely that
outcome,” said Stephen Innes, chief Asia market strategist at AxiTrader.
OPEC
members meet on Thursday, with the OPEC+ group meeting the following
day. OPEC+ has been curbing supply since 2017 and is expected to keep
the cuts in place to balance out record production in the United States.
U.S.
crude oil inventories fell more than expected last week, according to
the American Petroleum Institute (API). The API said crude stocks
dropped by 3.7 million barrels, more than double the expected 1.7
million barrels.
“Tuesday’s inventory number from API won’t have
done crude any harm ... Expectations for the U.S. Energy Information
Administration release today are for a smaller drawdown, which could
provide another boost for oil prices,” said Craig Erlam, senior market
analyst at OANDA Europe.
Oil prices are being held back by the
uncertainty over prospects for a trade deal between the United States
and China. The dispute between the world’s two biggest economies has
weakened the global economy and limited oil demand growth.
U.S.
President Donald Trump on Tuesday said an agreement to end the trade
conflict may have to be delayed until after the American presidential
election next November.
Prices are likely to fall next year as oil
supplies keep rising, outweighing any pick up in growth, Fitch
Solutions said. It predicted Brent crude will drop to an average of $62 a
barrels in 2020 and $58 in 2021, from a $64 average this year.
