The world’s largest oil exporter, Saudi Aramco, is considering a significant secondary share offering, led by the Public Investment Fund (PIF).
Prominent banks are vying for a spot at the table in the capacity of financial advisors and underwriters. These include Citigroup, Goldman Sachs, HSBC Holdings, Bank of America, and Morgan Stanley. No decision has been made yet regarding the selection of banks, the timing, or the number of shares to be sold.
Nonetheless, the deal is estimated to raise $20 billion in proceeds, further solidifying Aramco’s role in helping finance high-profile projects within the Kingdom, like the $500 billion mega-city NEOM.
Worldwide interest
The offering is expected to attract a broad investor base, encompassing regional and global participants. While it may temporarily divert funds from other Saudi listings, the Tadawul exchange’s focus on diversification through IPOs will likely ensure liquidity is spread across sectors.
Moreover, the offering is expected to draw foreign investment, which is already on an upward trajectory since KSA’s inclusion in the MSCI Emerging Markets Index in 2019. Aramco’s mammoth standing, both as a stalwart player in the global oil markets as well as a heavyweight on the Saudi stock exchange, will make it an appealing investment in the portfolios of global asset managers.
Fueling growth for company and country
Aramco’s upcoming secondary offering could be a double win. It will provide a boost to its liquidity and market breadth by increasing investor participation and enhancing the stability of Aramco’s ownership structure. If oil prices rise, more investors will be inclined to invest in the stock, and this large shareholder base will establish it as bellwether for the global oil industry.
The Kingdom’s economy also stands to benefit substantially. Divesting part of Aramco will enable the government to spread its economic focus, thereby reducing its reliance on oil revenues. Proceeds raised through this offering will be channeled into PIF.
The PIF in turn will invest the funds across various sectors, thereby facilitating economic growth and job creation. Any influx of foreign capital will also serve as a strong economic stimulus, which will be directed towards achieving Vision 2030 goals such as developing the private sector and honing an ecosystem that is conducive to entrepreneurial endeavors.
Aramco's ‘Vision 2030’ funding
Since launching Saudi Vision 2030 in 2016, the Kingdom has announced nearly $1 trillion in real estate and infrastructure projects, marking a significant development push. The upcoming secondary offering is expected to involve 1 per cent of Aramco’s shares.
With Aramco's market cap at around SR7.20 trillion ($1.89 trillion), this sale could raise about $18.9 billion, close to the projected $20 billion. Aramco’s market value fluctuates with global oil prices, production levels, reserves, operational efficiency, and investor sentiment, potentially driving the share price higher.
Hypothetically, if the government sells 1 per cent of its Aramco stake annually for five years, each sale estimated at $20 billion, it could generate $100 billion, covering about 10 per cent of the capital needed for Vision 2030 projects.
Aramco’s dividend policy
In 2022, Aramco introduced a new performance-linked payout mechanism that targets distributions of 50-70 per cent of the remaining free cash flow after accounting for the base dividend and other external investments.
Aramco’s dividend payout over the last 12 months stands at $109.31 billion, which is significantly higher than the total dividend payout of $57.96 billion in 2018. This is a testament to the growing importance of Aramco as a crucial revenue source for financing the Saudi government’s expenditure and projects under the Vision 2030 framework.
The projected payout for 2024 stands at $124 billion, which would boost dividend yield of 4-6 per cent. However, it is expected to lower Aramco’s net cash position by $8 billion to $9 billion per quarter throughout 2024. Nevertheless, the company’s balance-sheet remains the strongest amongst its peer group.
Aramco is the backbone of Saudi Arabia's economy, generating a staggering 40 per cent of GDP with $440 billion in revenue in 2023. Its hefty profits fuel domestic and international investments, solidifying its global leadership since 2016. Amassing a record-breaking $722 billion in profits over eight years, Aramco outpaces even Apple's $558 billion over the same period.
This dominance extends to individual years, with its 2022 performance setting a historical high of $159 billion in profits.
