When is the right time to buy Saudi Aramco’s overpriced shares?
Many global investors will never be interested—scared away by conflicts of interest, Saudi Arabia’s dubious human rights record or an aversion to owning fossil-fuel stocks. But even those who would buy into the state-backed Saudi oil giant at the right price may be in for a long wait.
On Thursday, Saudi Arabian Oil Co., as the company is formally known, priced its stock at 32 Saudi riyals ($8.53), the top of the previously indicated range. International investors have largely stayed away as they were willing to pay only around 24 riyals, based on a Bernstein survey that put the average company valuation at $1.26 trillion. The current shares are largely being sold to committed local shareholders and strategic buyers who are unlikely to bail out quickly. Indeed, Aramco is hoping the stock jumps a few percent on its first day of trading, probably Dec. 11.
A pop wouldn’t be unusual for Saudi Arabia’s Tadawul stock exchange. The kingdom’s 80 initial public offerings between 2003 and 2011 delivered a first-day price bounce of 240% on average, according to research by Professor Jay Ritter, one of the highest in his 54-country data set. U.S. IPOs since 1960 have popped 16.8% on average.
But no one expects a 240% jump this time around. Aramco has been overpriced for political reasons. It is being billed as the world’s biggest IPO, raising $25.6 billion for the kingdom—though Mr. Ritter highlighted that on an inflation-adjusted basis the 1986 listing of Japan’s Nippon Telegraph and Telephone would be the largest, at roughly $34 billion.
The Aramco offering was initially conceived to raise up to $100 billion in international capital to fund Crown Prince Mohammed bin Salman’s efforts to diversify the kingdom’s economy. Scaling the listing back has meant the money has come from local and regional buyers, ramping up pressure to ensure initial trading delivers at least a modest price pop rather than a drop.
Aramco’s initial shareholders will be one-third retail and two-thirds institutional, primarily from Saudi Arabia with as much as a fifth from around the Gulf and Asia. That will make it slightly more international in its investor base than the Tadawul average. The value of Aramco’s listed shares will make up about 5% of the bourse.
A majority of the new shareholders will likely hold on to their shares. Locals won’t rush to sell their piece of the kingdom’s crown jewel. The large group of high net worth individuals, government-related entities and other local institutional investors under pressure to buy shares are also unlikely to sell them early and risk the crown prince’s ire. Individual investors are in line to receive a 10% bonus allocation from the state’s holdings if they hold their shares for six months, capped at 100 additional shares. There are almost no fast-money hedge-fund investors involved.
There will be buyers too. The major index providers—FTSE Russell, S&P Dow Jones and MCSI—are expected to add Aramco to some of their indexes, which could create demand for between $3 billion and $5 billion worth of shares. And the IPO was more than four times oversubscribed, suggesting others will be looking to mop up any shares that are sold.
With a surplus of buyers and a dearth of sellers, initial trading could be quite volatile but seems more likely to head north than south. The best hope of global investors waiting for a price more in line with other major oil companies may be to wait until Saudi Arabia sells another tranche of its Aramco shares. There are no immediate plans, but the kingdom may eventually be forced to raise funds. Current oil prices around $60 are far below the $80 level the International Monetary Fund says the kingdom needs to balance it budget. After the IPO it will still own 98.5% of the company.
Aramco isn’t a normal oil company and hasn’t had a normal IPO. Investors can’t expect normal trading in its stock either.
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