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London dodges bullet as Saudi Aramco turns down party invitation

“What’s fair value for a company that produces one in every eight global oil barrels, is instrumental in supporting oil prices and owns the world’s fourth largest integrated downstream system?” analysts wondered

Pool party
London's IPO scene is having to lilo for a while

Whenever you hold a party there’s always that person who gets invited but you really hope doesn’t come.

One particular big-boned Saudi seductress has been toying with a potential debut in London among other possible global financial centres for several years.

But over the weekend, big flirt Saudi Aramco decided to stay at home –and London investors should not go and cry in the bathroom but breathe a big sigh of relief.

While City of London investment bankers and lawyers dad been flirting back just as hard, looking to cop a feel of one of what would have been the City’s biggest ever flotation, it would have brought many complications to say the least.

Big weight

One snag for London would have been that Aramco joining fellow blue-chip oilers BP PLC (LON:BP.) and Royal Dutch Shell PLC (LON:RDSB) would have resulted in a colossal weighting towards oil for the FTSE 100 index.

BP and Shell currently have a weighting of around 17% of the Footsie total, meaning movements in the pair’s shares exerts a profound influence over the index’s rises and falls.

Compared to the £184bn market cap of Shell, the largest company on the LSE, Aramco’s valuation is calculated around five times as much at around US$1.2trn (£930bn).

Even if the Saudi oiler listed fraction of its shares in London this would be likely to take the sector weighting well over a fifth and make the FTSE 100 super-exposed to fluctuations in global oil prices and Saudi politics.

“It is certainly not desirable from a risk diversification perspective,” said analyst Ipek Ozkardeskaya at London Capital Group.

“Second, Aramco stocks will likely carry a certain risk of price manipulation, or other intervention from the Saudis. Saudis are known to loosen their purse strings when it comes to giving financial support to their markets. Hence, that would have given the British regulators some headache.”

Other baggage

While the Square Mile was fluttering its eyelashes, the Saudi Arabia connection have made many institutional investors bat an eyelid in a bad way.

Aramco certainly comes with a “lot of baggage”, says analyst Neil Wilson at Markets.com, delicately skirting around some sensitive events.

“It’s not a straightforward IPO – state links, human rights, geopolitical risks, environmental stuff – that’s a lot of bad boxes ticked here for your average western fund manager.”

Even ignoring this week's Human Rights Watch report of “abusive practices meant to silence dissidents and critics” and June's United Nations report that said there was “credible evidence” that senior Saudi officials, including Crown Prince Mohammed Bin Salman, were liable for the killing of journalist Jamal Khashoggi, as a company, Aramco does not have the best record on transparency.

Furthermore, to list in London, the proposed new ‘premium’ listing category in London that Aramco needed, has been criticised by UK business leaders as liable to lead to “undue hands-on and politically-motivated” interference in sovereign-owned companies, potentially having a detrimental impact on the UK’s wider corporate governance record.

Valuation questions

While Aramco has confirmed its choice of Riyadh’s domestic Tadawul bourse as the location for its market debut, some key questions remain up in the air.

Bin Salman, who has been touting the oil colossus around the world as he looks to drum up billions of dollars as part of his efforts to diversify the kingdom’s economy away from oil, has been looking for a valuation of around $2trn.

On Sunday the company did not provide the final offer price or the percentage of the shares to be sold, saying these “will be determined at the end of the book-building period”, with the IPO prospectus to be released on Saturday 9 November.

Playing it safe, perhaps, Goldman Sachs was still surveying a mountainous valuation range of $1.6trn to $2.3trn, while BofA Merrill Lynch’s valuation range is even wider at $1.2trn-$2.3trn.

That’s a US$700bn gap for Goldman and a US$1,100bn disparity for Merrill.

Bernstein analysts agreed that it was a sum that was difficult to work out, due to Saudi Aramco’s sheer scale, with US$111bn of net profits last year five times greater than Exxon or Shell, with a huge oil reserve that is the cheapest in the world to extract.

“What’s fair value for a company with access to 201bn barrels of proven oil reserves, produces one in every eight global oil barrels, is instrumental in supporting oil prices and owns the world’s fourth largest integrated downstream system pointing at Asia?” Bernstein analysts said in a note on Monday.

“While we’re used to valuing Big Oil, Aramco is Monster Oil, so this is literally the trillion-dollar question.”

Quick facts: BP PLC

Price: 508.9 GBX

LSE:BP.
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