Daily Management Review

Saudi Arabia Plans To Sell Aramco Shares For $11.2 Billion, Less Than Anticipated


Saudi Arabia Plans To Sell Aramco Shares For $11.2 Billion, Less Than Anticipated
After pricing the stock at the lower end of its forecasts, Saudi Arabia is set to generate more than $11.2 billion from the sale of shares in oil giant Aramco, which would contribute in funding the country's expenditure plans, the firm announced on Friday.
Aramco established a price range of 26.7 to 29.0 riyals, and its shares were priced at 27.25 riyals ($7.27).
According to a source with knowledge of the situation, the offering was covered four or five times.
International demand, which includes interest from China as well as other countries in Asia and Europe, was higher than it was for Aramco's 2019 initial public offering (IPO), according to two sources.
Tens of billions of dollars have been invested by Saudi Arabia in attempts to diversify its economy away from its reliance on oil. However, foreign investment has not always met its goals.
One individual said that there was more foreign demand than expected for this transaction, although Reuters was unable to determine how much went to foreign investors.
A request for comment was not immediately answered by Aramco or the Saudi government.
Through the Public Investment Fund (PIF), Saudi Arabia's de facto ruler Crown Prince Mohammed bin Salman's Vision 2030 is financing a wide range of projects, from the construction of futuristic towns in the desert to the development of electric cars.
According to Reuters, the $925 billion sovereign fund intends to narrow its emphasis in order to forward the agenda after reducing some of its marquee "giga-projects".
Sources and experts have stated that the PIF is expected to receive the proceeds from the share sale, but the money may also be used to close the kingdom's growing budget deficit as the price of oil has declined.
On Friday, Brent crude was down slightly from $80 a barrel, marking the third consecutive week of losses. In April, the International Monetary Fund (IMF) estimated that Saudi Arabia's budget needed oil at $96.2 a barrel.
Regarding the rationale behind the selling, Edward Al-Hussainy, head of emerging market fixed income research at Columbia Threadneedle, stated, "It is not clear that oil prices will continue to go up the way they have over the last several years."
While agreeing to extend most production cuts until 2025, the de facto Saudi-led Organisation of the Petroleum Exporting Countries and its allies—including Russia—detailed a comprehensive plan for eight members, including Saudi Arabia, to unwind some voluntary cuts over a year starting in October, provided market conditions permit. This would enable Aramco to sell more oil.
Al-Hussainy stated that the Saudi government was approaching the situation from a weak position and that they "need this liquidity, and they are very cash poor because of these investment projects."
Aramco was valued at around $1.76 trillion after its shares were sold at an almost 4% discount to their closing price on Thursday.
It took months to organise the secondary offering, which the institutions involved dubbed Project Bond, according to insiders. To this day, the largest share offering in history is still the 2019 IPO.
Aramco, the Saudi government's cash cow, increased dividends and unveiled a new performance-linked payment last year to lure investors despite decreasing production's impact on profitability. About 75% of Saudi Arabia's crude oil production potential is now being reached.
The company's relatively high value among oil majors, Saudi state ownership, and its posture in an era of transition away from hydrocarbons, according to several foreign investors, turned them off.
With the use of a so-called "greenshoe option," which enables banks to stabilise the offering price, the Saudi government is able to expand the sale of its about 0.64% holding in Aramco to 0.7% of the massive oil company.
About $12.36 billion would be raised from the sale of Aramco if that option is exercised.
On Sunday, the shares are scheduled to begin trading on the Saudi Exchange in Riyadh.