On Friday, November 8, world oil prices are falling during global trading. Brent benchmark energy fell 1.5% to $ 61.4 per barrel. This is evidenced by the ICE exchange in London.
Oil prices are adjusted after a noticeable increase since the beginning of the month. So, from November 1 to November 7, quotes grew by more than 5% - from $ 59 to the level of $ 62-63 per barrel. According to experts interviewed by RT, global investors reacted positively to the news about the imminent entry to the global stock market of the Saudi state corporation Saudi Aramco.
On November 3, the world's largest oil company officially announced its intention to hold its first public offering (IPO) on the Tadawul Saudi Arabian Stock Exchange. According to Reuters, securities trading may begin as early as December 11th.
“The emergence of information on the IPO Saudi Aramco was one of the reasons for the growth of commodity quotes. Investors have long been waiting for signals from Saudi Arabia, because the procedure itself was supposed to be launched back in 2017, but was canceled due to the country's geopolitical and economic problems. If access to the exchange does occur, it will become the largest in the history of the world stock market, ”Dmitry Alexandrov, chief strategist at UNIVER Capital, said in an interview with RT.
Initially, the kingdom planned to sell 5% of Saudi Aramco's securities and raise $ 100 billion. However, the total placement volume may be slightly lower than previously announced levels. According to media reports, at the moment, the Saudi authorities intend to place about 2% of the shares. However, the final figure will be announced only after the formation of investors' applications.
For the first time, the IPO Saudi Aramco idea was proposed in 2016 and became one of the main points of the Saudi Arabia reform program “Vision 2030”. The strategy is aimed at changing the structure of the economy and reducing the kingdom's dependence on oil. According to experts, the implementation of the plans requires large budget injections. The authorities are planning to attract a significant part of these investments through the sale of shares in Saudi Aramco.
“The main goal of the IPO is to attract investment in the Saudi Arabian market and raise the level of the Tadawul stock exchange against the background of other world financial platforms. Such a step will increase the desire of investors to invest more actively in the Saudi market. Thus, the country's government will be able to carry out the necessary diversification of the economy in order to rid the country of oil dependence, ”said economic analyst Ahmad Yasin in an interview with RT.
Note that back in 2017, the world's largest stock exchanges began to fight for the right to become a platform for the IPO Saudi Aramco. For example, Donald Trump called on Saudi Arabia to place the company's shares in New York. At the same time, the UK government actively promoted the idea of listing in London and provided the Saudis with a $ 2 billion credit guarantee.
According to experts, this interest of market players in the securities of the oil corporation is largely due to the desire of investors to acquire shares of the most profitable company in the world. As previously calculated by the international rating agency Fitch, in 2018, Saudi Aramco's profit before interest, taxes and expenses for the purchase and updating of equipment reached $ 224 billion.
At the same time, according to Moody's international rating agency, last year Saudi Aramco's net profit amounted to about $ 111.1 billion. According to this financial indicator, the commodity giant outperformed Apple ($ 59.6 billion), Samsung ($ 35.1 billion) and Alphabet Holding Manager, Google ($ 30.7 billion).
“The high profitability of Saudi Aramco is ensured by the low cost of oil extracted in Saudi Arabia, as well as the mitigation of the tax burden on the state corporation. In 2017, in preparation for the IPO, corporate taxes for the company were reduced from 85% to 50%. As a result, Saudi Aramco was able to dramatically increase profits and increase dividends, ”said Alexei Kalachev, an expert analyst at FINAM Group, in an interview with RT.
Fair rating
According to Alexey Kalachev, today Saudi Aramco controls 100% of the production and export of oil in Saudi Arabia. It is about 10% of global oil production and 15% of the world's oil exports.
As the Crown Prince of the Kingdom, Mohammed bin Salman, previously stated, the total cost of the state corporation is estimated at $ 2 trillion. This value is more than double that of the most expensive companies in the global stock market. For comparison: at the moment, Apple has a market value of $ 1.15 trillion, Microsoft - $ 1.1 trillion, Alphabet - $ 902 billion, Amazon - $ 886 billion. Such data are provided by the NASDAQ exchange.
Meanwhile, experts believe that in recent years, the estimate of Saudi Aramco could fall below $ 2 trillion. In an interview with RT, CAFT chief analyst Anton Bykov noted that the company's value could be affected by rising tensions in the Middle East and lower world oil prices. So, over the past year, a barrel of Brent crude has fallen in price from almost $ 80 to $ 60. Moreover, a recent attack on the corporation’s enterprises was also a negative factor for Saudi Aramco.
In mid-September, drones attacked the Saudi Aramco refineries. As a result, the company suspended production of about 5.7 million barrels per day. Thus, oil production in the kingdom fell by half.
However, by the beginning of October, the company was able to completely restore oil production. According to Ahmad Yasin, the resumption of Saudi Aramco's work so short could only increase investor interest in the future IPO.
“It is worth noting how quickly and efficiently the company managed to restore the level of oil production. Such a development of events only strengthened the desire of investors to increase their investments in the Saudi market. Investors have gained additional confidence that companies like Aramco are able to withstand the serious geopolitical challenges and their consequences in the Middle East, ”said Ahmad Yasin.
Price issue
Experts interviewed by RT differently assess the possible impact of the IPO Saudi Aramco on the global oil market. So, according to Alexey Kalachev, the company's listing on the stock exchange may not lead to a serious change in commodity quotes. Meanwhile, the expert believes that with the help of the IPO results, investors will be able to understand how energy companies of other countries are underestimated today.
“The resulting market valuation of the capitalization of a company controlled by the royal house of Saudi Arabia may affect the valuation of other state-owned corporations in the oil and gas sector. For example, IPO results can be used in fair valuation models of state-owned companies such as Rosneft or Gazprom, the expert believes.
As an expert at International Financial Center, Gaydar Hasanov, explained in an interview with RT, it is important for Saudi Arabia to ensure price and demand stability for its own oil before an IPO. To this end, Riyadh is strengthening its partnership with China.
“Now Riyadh is trying to maximize its relations with Beijing, as the largest importer of oil. The other day, the parties agreed to increase oil sales from Saudi Arabia to China by 151 thousand barrels per day in 2020. Such a step first of all creates security for the energy industry in Saudi Arabia and lays the foundation for the success of the IPO Saudi Aramco, ”Hasanov said.
According to Dmitry Alexandrov, today, oil market players are also closely following the development of trade relations between the United States and China. According to the expert, the end of the tariff war between Beijing and Washington, together with successful access to the Saudi Aramco exchange, could provoke an increase in world oil prices by the end of 2019.
“In the event of a successful IPO Saudi Aramco and an agreement between Washington and Beijing, the cost of oil by the end of the year will be in the range of $ 60-64 per barrel,” the analyst concluded.