Saudi Aramco achieves the $ 2 trillion target for the Crown Prince, despite doubts about the evaluation

UNITED STATES (OBSERVATORY NEWS) — Saudi Aramco on Thursday achieved the $ 2 trillion goal sought by Saudi Crown Prince Mohammed bin Salman as its shares rose for a second day, despite some skepticism about the value of the state-owned oil company.

Aramco’s initial public offering is a cornerstone of the Saudi crown prince’s vision to diversify the kingdom’s economic resources instead of relying on oil by exploiting the $ 25.6 billion offering to develop other sectors.

But that is well below his 2016 plan to raise up to $ 100 billion through a massive international and domestic IPO.

Riyadh reduced its ambitions after the reluctance of international investors due to the proposed evaluation, and only 1.5 percent of the shares of Saudi Arabian Oil Company (Aramco) were listed on the Riyadh Stock Exchange on Wednesday, which is a small volume of free floating shares for a large company such as Aramco.

Refinitiv data showed that Aramco shares reached 38.7 riyals ($ 10.32), which raises its market value to more than two trillion dollars, but closed at 36.8 riyals, up 4.5 percent from Wednesday’s closing price, bringing the company’s valuation to $ 1.96 trillion.

While the Saudi government praised the jump of ten percent for the stock in its first appearance on the market on Wednesday, which is the maximum allowed on the Riyadh Stock Exchange, as proof of the evaluation that was initially targeted, the support comes largely from loyal investors from Saudi Arabia and the Gulf region, as he says Some analysts say that their real value is less than that.

Aramco included news on all Saudi media on Thursday, with headlines such as “Aramco ascends the throne of the world” and “Aramco… the promise is fulfilled.”

But analysts at Bernstein put Aramco’s value at about $ 1.36 trillion, compared to the market value of US energy giant Exxon Mobil less than $ 300 billion.

“Saudi Aramco is the world’s largest and most profitable oil company – but size is not everything,” they wrote, noting the risk of slowing net profit growth if oil prices remained stable.

A report by the International Energy Agency on Thursday pointed to pressures on oil prices, expecting a significant increase in global stocks despite the agreement of OPEC and its allies to deepen production cuts as well as the expected decline in production of the United States and other countries outside the organization.

Bernstein said that Aramco shares should be traded at a discount, not a premium, over the share prices of major international oil companies, as the company’s governance is “the main source of risk for investors”, given that Saudi Arabia owns more than 98 percent of the company.

“Regardless of the valuation, one of the most important considerations for the funds that are actively managed will be environmental and social standards and corporate governance,” said Tim Love, investment manager for emerging market shares at GAM.

Refinitiv’s data showed trading of about 15.9 billion riyals of Aramco shares until the close, as transactions covered about 417.7 million shares. This constituted most of the total trading on the Riyadh Stock Exchange as a whole, which amounted to 18.5 billion riyals.

In a memo issued on Thursday, Zachary Civarati, CEO of Dalma Capital in Dubai, who invested in the IPO, said, “The initial price performance supports our hypothesis that Aramco set the price of its initial offering at a discount in order to allow the way for the rise during trading and to provide an opportunity for regional investors to benefit from the inclusion of the Dora Crown.”

“The average amount earned by institutional investors is less than one-sixth of the shares they requested in the initial offering, and they had to buy shares on the open market,” Civarati said of Aramco’s deal, which became the largest in the world by skipping the $ 25 billion listing of Alibaba in China in 2014.

– Take profit –

The success of the IPO completion also led to an increase in Aramco’s dollar bonds, which are now being traded with yields closer to that of Saudi sovereign debt bonds.

“It makes sense for Aramco (bonds) to trade at the same level of sovereign (bonds), as the Saudi economy is still dependent on oil, but the initial offering momentum certainly provided support,” said a banker who worked on Aramco bond issuance.

Some analysts expect a decline before Aramco shares stabilize due to its decision to sell a smaller share of its shares and rely mainly on local and regional buyers.

A trader in Riyadh, who asked not to be named, said that most of the early trading was on a small scale, between one thousand and 1500 shares, adding that this indicates that some individual investors were “happy to win six riyals per share.”

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

And she added, “We should not go too far to read the declines that occurred during the day. Let’s not forget that individual investors still dominate more than 93 percent of the market, and like any initial offering, exits will take place by investors who bought shares to grab a quick dividend from the issue.

Another trader said that Saudi investors are reluctant to leave their money in the market before the end of the week, as many lost millions when global markets collapsed during the weekend in the midst of the financial crisis and could not exit.

Aramco shares are also slated to join the main index of a trading exchange and global benchmarks such as MSCI and FTSE next week, which analysts said will fuel more demand, especially from inactive investors who track such indicators.

An analyst in the Gulf region, who asked not to be identified, said that investors ’transactions in the region may be driven by Saudi Arabia’s view of Aramco’s value.

“The investors will think: Why did it go up more … while its owners value them two trillion dollars?” He said.

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