The long-awaited prospectus for Saudi Aramco's initial public offering was released over the weekend. The Arabic version was 806 pages and the English one about 658 pages. The long line of investment banks (29 to be precise) that have been mandated for this issue certainly had their work cut out for them -- at least those who have been salivating at the prospect of this issue getting announced. Other than coming in handy as a remarkably sturdy nightstand, what did the prospectus actually tell us?
Aramco has agreed to sell about 0.5% of its shares to individual retail investors. But it does not indicate how much will be sold to institutional investors, or at what price. It cannot sell additional shares for six months, and will be restricted in issuing new shares for 12 months after trading starts. The book building will begin on Nov. 17, pricing on Dec. 5. Shares will start trading on the Dec. 11. But it did not confirm how much of the company it intends to sell in total or whether any corner stone investors would be taking part. We have only heard from sources that the company could sell 1%-2% on the local Saudi stock market, the Tadawul. It did not even highlight how the government will use the proceeds from the sale.
Other than harbor some serious environmental concerns, this prospectus of 600-plus pages left readers with more questions than answers. If one compares other oil enterprises like Russia's Rosneft and Norway's Equinor (EQNR) , formerly Statoil, their prospectuses detailed field by field outlines of proven and probable reserves, audited by independent third party advisers. Upstream operations are fully detailed, providing as much clarity as possible to enable investors firm a view.
The Aramco prospectus highlighted the risk of a terrorist attack, potential for antitrust legislation, as well as the Saudi government retaining the right to decide maximum output at any given time and direct Aramco to invest in non-core assets. It may also change its dividend policy without prior notice to its minority shareholders. The prospectus sounds more like a disclaimer than an outline.
The company wishes to raise funds that will value the company closer to $2 trillion. The banks on the deal have a range anywhere from $1 trillion to $2.2 trillion. Not entirely sure what oil price assumptions they are using, but a valuation with such a wide range surely shows no one has a clue. To put it rather simplistically, one just needs to take 10 million barrels per day of production at say an oil price of $X/barrel using a 10% discount factor, and, boom, you should have your answer quite easily.
At the end of the day, it is all about the oil price one would put in their model for now and for the long term. The latter can generate a whole new academic debate. Being realistic, a price of $60/bbl Brent for next few years and a long-term oil price of $45/bbl would seem quite reasonable. According to Palissy Advisors, who are one of the only voices outside of the deal, the value is closer to $1 trillion. Well, we know who will not be invited for the secondary issue, if at all. Modelling is more of an art than a science. And these days it is a science for financial engineers. If one tweaks the long-term price by even $1/bbl., that alone can generate quite a shift in the valuation.
Oil sector super majors like Exxon (XOM) , BP (BP) , Total (TOT) , and Shell (RDS.A) , are very cheap stocks, but for good reason as their earnings have been in decline for the past five years. The saving grace for oil majors is their dividend yield, which tends to be around 4%-6%. This attracts a lot of income funds who want to add the oil names to their portfolio for just the income they yield annually. It seems rather pointless to buy a stock that yields 5% per year, but falls 15% the same year, doesn't it? The math simply does not add up.
Aramco has promised to pay shareholders $75 billion in dividends next year. If one assumes the same dividend yield as Royal Dutch Shell in the U.K., that would back out a valuation of $1.25 trillion, around a 20% discount to where the whispers are currently ($1.5-$1.7 trillion). A higher valuation would imply a lower dividend yield and dissuade international investors to buy into the issue as they could probably buy a basket of international oil stocks and get the same exposure to the oil price.
There have been talks of China investing about $5 billion-$10 billion in Aramco through the IPO. For China, this could be more of a strategic investment than a valuation play per se. Given this is the nation's No. 1 supplier of crude, it could work to China's advantage to support the company, which might give the nation the insensitive to invest a few billion dollars here and there, so to speak. Securing China and some key cornerstone investors will set the price for the soft book build, which can then allow company to get other investors on board.
An exploration and production company is all about valuation, production, and upside growth. Oil super majors lack the third trait, hence, just become a lagging version of the oil price proxy. Anyone who invests in a name today would certainly have to have a very strong view on the oil price and demand and supply in the face of alternative energy, renewables, and substitution, not to mention geopolitical dynamics of the region.
Investing is all about the price. To make an IPO a success, regardless of how much money the company needs, it needs to be priced at an attractive enough discount to garner good support from quality institutions willing to hold the stock for long term, generating a healthy secondary after-market that will permit the stock to rally to much higher levels.
Private companies do not face the scrutiny that listed companies do. Once listed, it will need to play by the same rules as the other kids in the playground: full disclosure, quarterly updates and rigorous due diligence by investors asking tough questions on balance sheet strategy and management discipline. And if it decides to launch on the international exchanges, that scrutiny will be ten-fold.