Will Saudi Aramco's massive share sale to raise $12B pay off?

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DUBAI —  Saudi Arabia kicked off on Sunday a long-anticipated sale of another chunk of Saudi Aramco, the state energy company, to local and international investors. The sale of a new 0.64% stake in the crown jewel of the Saudi economy is expected to be completed by June 11 and is anticipated to raise up to $12 billion. It follows the initial sale in 2019 by the Saudi government of a 1.7% stake in the kingdom’s energy company. The shares were sold on the local stock market, attracting various buyers from institutional to retail, local and international investors.

Saudi Aramco said the proceeds of the offering will go to the Saudi government, which was the sole owner up until 2019, when the first IPO took place, and has seen its share in the oil company drop to 81.5% after the latest sale. 

The gradual transfer of ownership is depriving the Saudi government of part of Aramco’s dividend payments, instead transferring the company’s profits to investors, most notably the Saudi Public Investment Fund and its subsidiaries, which have owned a 16% stake in the company since March 2024. 

The kingdom’s sovereign wealth fund is the main vehicle used by Crown Prince Mohammed bin Salman to fund Vision 2030, a reform program that aims to diversify the Saudi economy beyond its heavy reliance on oil revenues but has struggled to attract foreign investments. 

“Saudi Arabia has struggled for a long time with being able to entice direct investment from abroad,” James Swanston, a Middle East and North Africa economist at British research firm Capital Economics, told Al-Monitor. “This has resulted in the state having to invest more itself, but against the backdrop of budget deficits has had to increasingly lean on the Public Investment Fund to fund these local projects.” 

Scott Livermore, managing director at Oxford Economics Middle East, told Al-Monitor that he expects “more foreign participation as key projects and the implementation of the Vision as a whole matures.” 

A cash-poor Saudi state?

As Aramco’s dividends are increasingly diverted into the PIF, the Saudi government needs to secure new income flows. The kingdom has been consistently running a deficit since 2013, excluding in 2022, and expects to be $21 billion in the red in 2024, $19 billion in 2025 and $29 billion in 2026, according to Saudi Arabia's 2024 budget statement. While the PIF technically belongs to the government, the two entities have separate balance sheets and the government does not tap into the fund to address its growing deficit.

Experts say the occasional sale of assets such as Saudi Aramco shares will be repeated to help meet the government commitments that include a combined tab for public sector wages, subsidies, grants and social benefits forecasted to reach $173 billion in 2024. 

But share sales are insufficient to fill budget deficits indefinitely. Complicating matters further, each time the government sells shares, it loses the dividends that come with it, contributing to pushing the budget deficit higher. Riyadh has seen its debt pile increase in recent years. The kingdom's debt as a percentage of its gross domestic product rose from just 1.6% in 2014 and is expected to reach 25.9% in 2024, Saudi government data show. According to data compiled by Bloomberg, Saudi Arabia has sold $17 billion of debt to international markets and $25.5 billion domestically so far in 2024.

Swanston said moderate oil prices are behind Saudi Arabia’s “turn to international capital markets and the Aramco issuance to help finance the shortfall.” He added, “If oil prices were to slide back further it could lead to a turn back to austerity." 

Money managers still cautious

International investors' appetite for the Saudi energy company has been quite limited so far, leaving the Saudi government reliant on local investors to raise fresh capital. Some investors see Saudi Aramco as currently overvalued, while other potential investors have expressed skepticism of the Saudi stock exchange's transparency.

Foreign investors owned only 0.4% of Saudi Aramco as of May 2024. That is less than a quarter of the number of shares that were listed on the stock market prior to the latest sale, Tadawul data showed. In the broader Saudi stock market, foreign ownership stands at 11.6%.

While Saudi Aramco has yielded juicy dividend returns, its lack of capital appreciation could discourage some international investors. Bloomberg Intelligence estimated the company’s dividend yield at 6.6%, which is one of the oil industry’s biggest. Still, shares of Saudi Aramco traded at 28.9 Saudi riyals ($7.71) on Monday, roughly 10% below the 2019 IPO price of 32 riyals ($8.53).

While international investors did buy into the latest batch of Saudi Aramco shares, it is still unclear what fraction they represent of the total. This week, Saudi Aramco’s executives are expected to go on a road show in the United States and the United Kingdom to try to boost demand.

A complicated disclosure process and legal risks pushed the company to abandon plans to list abroad, depriving it of the large investor base and pools of liquidity offered by leading global stock exchanges such as those in New York, London, Hong Kong and Tokyo.

The latest developments signal further trouble ahead for the oil giant. Saudi Aramco’s net income dropped by 14.5% year-on-year in the first quarter of 2024, primarily due to a sharp drop in output volumes to comply with OPEC+’s production cuts. However, at $78 per barrel, oil prices have still hit their lowest level since mid-February. 

The oil cartel’s members agreed on Sunday to extend some output cuts into 2025 and start phasing out others in the last quarter of 2024, allowing Saudi Arabia to increase production to 10 million barrels per day by the end of 2025. That is one million barrels more than Aramco’s expected output for the summer 2024, yet well below its capacity of 12 million barrels a day.

Saudi Aramco faces additional challenges as investors grow more concerned about companies that are large greenhouse gas emitters. The Swedish pension fund Seventh AP Fund (AP7) announced on Monday that it has blacklisted the Saudi company from its portfolio along with six other companies including PetroChina over their carbon-intensive operations. "The companies are blacklisted because they do not act in line with the Paris Agreement due to large-scale oil or coal operations without transition plans," AP7 explained in a statement.