Learning process all around as Saudi Aramco prepares for market
There was talk at Saudi Aramco’s initial public offering (IPO) presentation in Dhahran on Sunday of the need to “educate” people about the forthcoming share sale, and it is true that such a massive financial transaction is complex and cloaked in terminology not immediately familiar to all.
Domestic Saudi investors, some of whom will be buying shares for the first time, will have to learn a whole new vocabulary: Equity, dividend, puts and calls, margin trades, shorts and longs, and the like. It can be a complicated and confusing process, but most sensible people will get the gist of it pretty quickly.
In the UK in the 1980s (at the height of the privatization bonanza under then-Prime Minister Margaret Thatcher, when many state-owned companies were sold off) a new breed of streetwise share traders emerged virtually overnight. There is no reason the same cannot happen now in Saudi Arabia.
The second job of education is for international investors, some of whom have never before thought of investing in the region, but for whom the lure of the world’s most profitable company will be too great to resist. This might be more difficult.
For some Western investors, the perception gap is significant. For example, some potential investors in the IPO a couple of weeks ago were under the misapprehension that the attacks on oil facilities would produce a serious financial hit that might change their minds about an investment in the offer at all.
Saudi domestic investors will be on a steep learning curve, not just in terms of the language of share dealing, but also in the basic philosophy.
They were reassured at the highest level that this was not the case, but insisted on hard financial fact. They got it on Sunday with the publication of the figures for the first nine months of this year: Net income of $68 billion, free cash flow of $59 billion and “no material impact” on Aramco’s finances.
There is probably a job of schooling to do on dividend policy as well. Yes, Aramco really does mean it when it says that it will pay a minimum of $75 billion in total, and that those who take up shares in the IPO will get priority ahead of the government (which will remain the biggest shareholder by far) when it comes to dividend payouts.
The total valuation of Aramco in the IPO will be a subject where each side (share vendor and share purchaser) will have to learn a little from the other. There does seem to be some serious objection on fundamentals to the $2 trillion figure that emerged early on before IPO technicalities had been properly analyzed in light of global markets and energy economics. Much has changed since 2016 in the oil markets.
Finally, Saudi domestic investors will be on a steep learning curve, not just in terms of the language of share dealing, but also in the basic philosophy. Equity ownership is not a day at the races. It is a participatory privilege that gives the shareholder a stake in the way his or her economy is run, and it should be exercised responsibly and with a view to the long term.
• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai