Why Analysts still Cautious about IPO of Saudi Arabia

Why Analysts still Cautious wary about IPO of Saudi Arabia

Saudi Aramco finally announced its initial public offering (IPO); on the other side, some analysts still thought that investors should think twice before taking any step. Aramco is the most profitable organization in the world, and it announced on Sunday that they are making plans to list on its local stock market, the Tadawul. However, due to the deficiency of the details on the listing, it might be the largest on record and left some analysts cold. According to them, there are a lot of reasons why global investors should be suspicious.

Deficiency of Details about IPO

On Sunday, Aramco said that the final number of shares offer price to be sold and shares’ percentage to be sold will determine at the book-building period end. The IPO prospectus of the company released on 9th November. They said, such analysts left gambling on the offering finer details, and these might make all the difference to the interests of investors. Resources analysts at Fat Prophets, David Lennox, said that since the IPO confirmed, but at this stage, they haven’t given a proper timeframe as to when the transaction goes underway or finalize. Former reporters suggested that the Kingdom of Saudi Arabia will list about one percent to two percent of Aramco on its domestic stock exchange and, after that, list another part of a global exchange at another later date with an overall public sale of approximately five percent of the firm.

Exchanges in Tokyo, New York, Hong Kong, and London have all contesting for the global listing. Furthermore, Lennox said that the evaluation could make a difference to the investors. They also not observe any type of valuation, though they see extensive numbers from one trillion dollars to two trillion dollars, he added. According to them, it’s around $1.4 trillion, so you can take your pick. However, the other factor no one knows at the instance, how much of it are they going to float? Thus, there are numerous questions, yet one wants to get their answers before he goes to see Aramco’s IPO go ahead.

Saudi Aramco to Deliver Growing Dividends

During the last few years, the IPO has been deeply-projected while it delayed due to the valuation risk the location of the share listing, oil price volatility, and geopolitical events like missile & drone attack in September on oil fields. The public listing might be the largest of the world, and in the case, it attains an estimation of about $1.5 trillion, Saudi Aramco might surpass the market capitalization of tech giants such as Microsoft and Apple. The organization said among others, one of their priorities was bringing growing and sustainable dividends through price cycles of crude oil, and that termed to the discretion of board after deliberation of several factors, the board have intentions to announce aggregate usual cash dividends of minimum $75 billion with respect to 2020, along with any potential special dividends.

How far-off that dividend goes will depend on the number of shares the firm decides to list. Lennox said they acquired the dividend amount while they just don’t know the shares’ amount. Added that if they issue a huge number of shares, then the amount of dividend is not going to go far. In the meantime, analysts at Bernstein noted that it was difficult to judge a firm like Aramco, that likened to a giant oil company. They mention the fact that Aramco is the world’s most profitable firm; in 2018, its net revenue was $111 billion, and that was five times greater than Shell or Exxon. Moreover, the analysts highlighted that the company has an oil reserve life of about fifty-two years, and its reserves are inexpensive to extract.

Why Analysts still Cautious about IPO of Saudi Arabia

Bernstein Senior Analyst Neil Beveridge and Oswald Clint said in a Monday note that we could not finalize the exact worth of the company with access to 201 billion barrels of confirmed oil reserves.

Geopolitical Factors

Saudi Aramco is also facing geopolitical factors such as the kingdom’s tense environment with regional competitor Iran, which could also reduce investor sentiment. Quilvest Wealth Management’s investment committee member Bob Parker told the international news website that if one sees at it from international investors’ perspective, obvious concerns always there. He questioned, does anyone want to invest in a kingdom where the terms with Iran relate to trouble? Investors also had a risk of infrastructure related to the missile and drone attack a few months back, and a large part of the infrastructure of Saudi Aramco damaged after the attack.

Additionally, Parker said the evaluation might also an aspect adding to the concerns of international investors. He added, investors from the globe might say well possibly he needs a discount to permit his investment in Aramco. However, that discount does not appear to be there. He said that he also believed the prices of oil going to subject to downward pressure. Parker warned that because of all those factors, he thinks that would be a difficult IPO.

Up and Down of Oil Prices

Oil prices fell heavily in 2014 mid because of the surplus in international supply and lackluster demand. Prices dropped dramatically, and main world oil producers such as Saudi Arabia, along with other OPEC producers decided to cut production to help stabilize demand, supply as well as prices. Meanwhile, shale producers of the United States did not cut back production, and still, there are worries regarding supply dynamics and demand, specifically amid an ongoing trade dispute between the United States and China that diminished international growth. Last Monday, oil was trading at about $56.62 for West Texas Intermediate (WTI) and around $62.22 per barrel for Brent crude. About five years ago, both were above $100 per barrel.

Analysts like David Lennox observes that the IPO of Saudi Aramco might be coming too late and probably this Aramco’s IPO several years late. Lennox said that now the international market got in the United States, a well-established rival producing twelve million barrels of oil per day while many years ago, that was not even around.

Read Also: KSA officially announces Aramco IPO with a national listing set for Dec


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