Daily Management Review

Saudi Aramco sparks a wave of IPOs in the Middle East


Saudi Arabia's plan for the initial placement of shares of the oil corporation Saudi Aramco forced other countries of the Middle East to pay attention to the stock markets.

Three years of low energy prices forced the countries dependent on the sale of oil to pay attention to public markets as a way to patch holes in the budget. In addition, the countries of the Gulf thus are trying to diversify their economies. Many have already issued bonds. Now comes the turn of the stock markets. The most significant is the initial public offering of a 5% stake in Saudi Aramco. After listing on the stock exchange, it will become the world's largest capitalization company. Since the beginning of the year, 32 IPOs worth $ 1.5 billion have passed through the Middle East, the Wall Street Journal reported citing data from Dealogic. This is more than the two previous years combined.

Some IPOs have already been announced, others are under preparation. It is planned to place shares of such state-owned commodity companies as Abu Dhabi National Oil Co (ADNOC), Kuwait Energy, Emirates Global Aluminum and Oman Oil Co. Some countries are trying to get ahead of Saudi Arabia, fearing that the IPO of such a giant as Aramco will make it difficult to sell shares of their companies.

The sale of state assets is a relatively new phenomenon in the Middle East, where governments control a significant share of the economies. Global investment funds did not have an opportunity to get direct access to the oil industry of the Middle East. Thus, privatization will open a lot of opportunities for financial organizations interested in investing in global energy. However, investors are concerned about the geopolitical tensions in the region, especially after the worsening of relations between Qatar and its neighbors.

Aramco's IPO is scheduled for 2018. Estimates of the company's value range from 500 billion to 2 trillion dollars. The public offering was first announced in 2016. According to representatives of the company and the government, it forced other countries to consider the possibility of privatizing their own assets.

A senior government official in Oman notes that Aramco's IPO "definitely prompted" other companies in the Persian Gulf to reconsider their strategy. Not only the upcoming listings will raise the capitalization of the Omani stock market, but will also attract foreign investors to the country.

It is expected that the first will be ADNOC’s IPO. Later this year, the company plans to sell a retail unit that controls gas stations and supermarkets. According to the company’s management estimates, the IPO will attract $ 1.5-2 billion.

Earlier, regional governments saw no reason to attract external financing for their generous budgets, because a barrel of oil was worth more than $ 100 in the period from 2011 to 2014. But the increase in production in the US and other countries led to a collapse in prices. In early 2016, the cost of the barrel dropped to $ 30. Currently, Brent crude oil costs about $ 52 per barrel. According to Moody's Investors Service, oil accounts for about 25% of the GDP of the countries of the Cooperation Council of the Arab States of the Persian Gulf. Revenues from its sale are approximately 2/3 of the budget of local governments.

Mustafa Ansari, an energy expert at Arab Petroleum Investments, says: "The reality is that oil is unlikely to grow to its previous level. Not only the countries of the Persian Gulf are trying to diversify the economy, but are also trying to build priorities for investment in key sectors. " Countries in the region are attempting to reduce the dependence of the economy on energy, developing the financial services sector, the chemical industry and even the manufacturing sector. Ansari says: "They cannot achieve this without the help of private investment."

About two years ago, the countries of the Middle East drew attention to the bond markets in search of money. Last October, Saudi Arabia posted a short-term government bond issue at a record $ 17.5 billion. According to Moody's, in 2017, the GCC countries attracted $ 38.9 billion in bond markets. Until the end of this year, it is planned to issue T-bills worth $ 32.5 billion.

Bankers say that primary placements are a natural extension of this process. The sale of bonds can be arranged in a short time. Preparing for an IPO takes months, and sometimes years. In addition, the local stock markets support will not hurt either. Most of the stock exchanges in the Persian Gulf missed the rally in emerging markets this year. In 2017, the index of the Saudi Arabian stock market grew by only 0.7%, the index of shares of Abu Dhabi decreased by 1.3%.

source: wsj.com