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Saudi Aramco valuation inching towards $2trn- Can this be sustained?

Looks like Saudi's Aramco's $2trn initial valuation may come true despite west's skepticism. But will it hold true 6 months from now?

The shares closed at 35.2 riyals ($9.39) each, up from the initial public offering (IPO) price of 32 riyals ($8.53) At $2 trillion, Aramco would pay shareholders a dividend equivalent to a return of less than 4%, well below what other major oil companies pay. Saudi only listed 1.5% of the company – half of initial expectations and this follows the 4.65 times over-subscription seen in Aramco’s IPO

Saudi Aramco shares surged the maximum permitted 10% above their IPO price on their Riyadh stock market debut on Wednesday. 

The shares closed at 35.2 riyals ($9.39) each, up from the initial public offering (IPO) price of 32 riyals ($8.53).

That gives Saudi Arabian Oil Co (Aramco) a market value of about $1.88 trillion, comfortably making it the world’s most valuable listed company and closing in on the $2 trillion price tag long coveted by Saudi Crown Prince Mohammed bin Salman.

The biggest IPO in history raised $26.5 billion in cash before trade started.  

Aramco pumps around 10% of the world’s oil.

Read: The Saudi Aramco IPO and Brent crude oil prices will fly in December!

A Tadawul first 

Some 1.1 billion riyals worth of Aramco shares changed hands, more than a quarter of the Saudi market’s traded value.

Aramco stock will become part of Tadawul index by next week and global benchmarks such as MSCI and FTSE later this month, which analysts said should fuel demand, particularly from investors who track such indexes.

Insiders noted that more than three-quarters of its shares were bought by either Saudi nationals, or investors in neighboring Gulf states, namely Abu Dhabi.

Saudi Crown Prince Salman has promised Saudis who hold the stock will be rewarded with 100 free Aramco shares for every 10 they have by the middle of 2020.

Saudi oil minister Prince Abdulaziz bin Salman said in an interview at an OPEC meeting in Vienna last week: “Those who have not subscribed in Aramco will be chewing their thumb to the point that I will be worried about them that they go and fix themselves in the hospital.”  

Read: This Thursday’s OPEC-Aramco coupling has global implications

The west not convinced 

The consensus from foreign investors was around a valuation of around $1.2 trillion, but ranged between $800 billion and $1.5 trillion. 

“Up to $1.5 trillion based on dividend,” was the feedback from Franklin Templeton, the emerging markets specialist and among the most generous. 

The problem for many investors was summarized in two words: dividend yield. At $2 trillion, Aramco would pay shareholders a dividend equivalent to a return of less than 4% on their money, well below what Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp. and other major oil companies pay.

Wellington Asset Management, which controls $1 trillion in assets, told bankers the dividend yield needed to rise to 7 or 8% to make the company a worthwhile investment, implying a valuation of about $900 billion.

 Events leading to listing 

The sale, initially scheduled for 2018, was delayed several times as the Saudi leadership grappled with where to list it and how much it was worth.

Then Sept. 14 came when a fleet of drones attacked Aramco knocking half of company’s production off, before it went back on weeks later.

Bank tax rates were cut further and investors were offered incentives to buy the shares. The intention to float was finally announced by Yasser al-Rumayyan, Saudi Aramco’s chairman on Nov. 4, but scrapped plans to market the shares internationally and cancelling a roadshow in London and other financial capitals. 

The Saudi government even spent more than $2 billion of its own cash buying shares, according to the Financial Post. 

Read: Aramco’s retail strategy has worked, raising $25bn. Come Wednesday, will shares go up for investors?

Future Aramco prices

The important metric is less how far the current price rises above Aramco’s $1.7 trillion initial public offering valuation, and more what happens six months from now.

Saudi only listed 1.5% of the company – half of initial expectations and this follows the 4.65 times over-subscription seen in Aramco’s IPO. 

In opening trading, 25.6 million shares were traded, against 200.5 million of buyer demand. The shares traded on Wednesday morning are only worth about $240 million.

“Local demand is playing a big role. Retail investors, who bought a third of the float, have been incentivised to hold for six months by the promise of bonus shares,” said Reuters.  

There are logical reasons for the price to stay supported. Last Friday Saudi engineered a commitment from the Organization of the Petroleum Exporting Countries and allies to cut output, which should stop the oil price collapsing amid weak economic growth next year. 

Meanwhile hedge funds have a simple trade: buy now and then flip to passive funds that will buy over $2 billion of Aramco as it enters emerging markets fund indices like MSCI. 

But once these factors fall away, Aramco’s stock could suffer, Reuters reasons.

If the crown prince wants Aramco to hover around $2 trillion, local investors will be wary of dumping the stock 6 month down the road when incentives’ limits kick in. Will foreign investors, the key points of the exercise, be incentivized to buy then?