Early demand is strong for Aramco’s $13bn share sale

June 3, 2024, 4:06 AM

Yasir Al-Rumayyan, chairman of Saudi Aramco

Stock offer sells out in hours
1.5bn shares on offer
Company hopes to raise $13bn

The Saudi oil giant Aramco’s secondary share offering opens to retail investors today in a sale that could bring huge dividend payouts if they set aside concerns over flagging oil prices and regional political tensions.

Institutional investors covered the offer within a few hours on Sunday, but reports say Aramco is planning events in Britain and the US this week to drum up interest overseas.

Aramco aims to raise up to $13 billion by selling a 0.64 percent stake, or 1.5 billion shares, as the kingdom seeks extra funds to plug its gaping budget deficits.

But with only 2 percent of the company openly traded at present after an IPO in 2019, there is clearly scope for further offers.

Ten percent of the shares on offer will be reserved for retail investors, who have until June 6 to subscribe, while retail investors have until June 5. The final price will be set on June 7.

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The share price moved only slightly on Sunday when the bookbuilding process for institutional investors began, ending at SAR28.45.

All sales were bought up just hours after opening on Sunday.

The offer ends on June 5 and the final price will be announced on June 7.

The offering could get a boost after Opec+ on Sunday extended its deep oil production cuts into 2025.

Aramco paid a $31 billion dividend in the first quarter, despite a fall in year-on-year net profit by 14 percent, to just over $27 billion, due to lower oil prices and volumes. It expects total dividends to reach more than $124 billion in 2024.

The Saudi oil producer’s stock price was down around 12 percent this year up until last week’s announcement, while shares of peers such as ExxonMobil are up 14 percent and BP up 4 percent.

This means that Aramco’s higher price-to-earnings ratio will be a big draw for local and international investors.

“Both investor groups may be drawn by a strong dividend yield and the company’s strategic importance in global energy markets,” says George Khoury, global head of education and research at the banking and finance training provider CFI.

However, “Geopolitical tensions in the region and operation disruption risks could deter some investors.”

Aramco raised $25.6 billion in its initial public offering in December 2019, the world’s biggest.

Only 2 percent of the company’s shares are openly traded, since the government retains an 82 percent stake and the Public Investment Fund (PIF) owns 16 percent.

The new offer could expose continuing international reticence over ploughing money into Saudi Arabia, one factor that has caused delays to the giga-projects at the heart of Saudi Arabia’s economic reform programme.

Even during the 2019 IPO, international interest was less than anticipated, valuing the company at under Crown Prince Mohammed bin Salman’s hoped-for $2 trillion.

Since then, the government has struggled to raise foreign direct investment for its giga-projects.

Given current financial woes, the government is more likely to use revenues from the follow-on sale to shore up its budget deficit, says James Swanston of Capital Economics in London.

“Saudi will run larger budget deficits than it anticipates and needs to finance that shortfall," he says.

"It has turned to bond markets more aggressively this year, but if this issuance can raise $13 billion it would go a long way to help plug the deficit."

Oil is trading at around $81 per barrel, well below the International Monetary Fund’s estimate of Saudi Arabia’s fiscal breakeven price, $96.20.

The government has forecast three years of budget deficits, which has caused PIF to put the brakes on giga-project spending.

Some analysts think Aramco has chosen a particularly weak moment for the sale.

Ole Hansen, head of commodities strategy at Saxo Bank, says: “Factors like crude oil prices hovering around $80 instead of the anticipated $90, coupled with Aramco’s weakest stock performance over a year due to lower prices and Saudi production restraints, could result in lower proceeds compared to other times in recent months.”

Aramco’s acquisition of a 40 percent stake in Gas & Oil Pakistan, flagged in December and completed on May 31, could also raise the stock’s attractiveness.

PIF has been looking at other ways to raise money for the Saudi giga-projects. It saved at least $15 billion by divesting from US equities this year. And local banks are being pressed to increase lending.

Some projects, such as the horizontal city The Line, have been pared back, while companies have been merged as business entities.

“The offering is substantial relative to the size of the Saudi stock market, but the proceeds from the sale would still only meet a fraction of the cost of the projects,” Hansen says.