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Saudi Arabia's New Aramco Share Sale: A Strategic Financial Move to Raise $13.1 Billion


Saudi Arabia's New Aramco Share Sale: A Strategic Financial Move to Raise $13.1 Billion


Saudi Arabia has once again turned to its state oil giant, Saudi Aramco, to bolster its economic diversification efforts. On Thursday, the Saudi government filed papers to sell a new stake in Aramco, aiming to raise as much as $13.1 billion. This landmark deal is designed to support Crown Prince Mohammed bin Salman's ambitious plan to transform the kingdom's economy, reducing its heavy reliance on oil revenues and expanding into new sectors.



Details of the Share Sale



The primary component of the deal involves offering approximately 1.545 billion Aramco shares, which equates to about 0.64% of the company. If the sale prices at the top end of the range, between 26.7 riyals ($7.12) and 29 riyals, Saudi Arabia could raise $12 billion. The deal’s value could further escalate to $13.1 billion under a so-called greenshoe option, which allows the sale of nearly 1.7 billion shares, or a 0.7% stake. This option is designed to stabilize the price of the offering by granting bankers flexibility to manage additional shares.



Strategic Importance



Investors have been eagerly anticipating this share sale as part of Aramco's broader strategy to diversify its shareholder base and generate substantial funds. According to Aramco's CEO, Amin Nasser, the offering is not only about raising capital but also about increasing liquidity and boosting the company's global index weighting. This move is the culmination of years of effort following Aramco's record-setting IPO in 2019, which raised $29.4 billion.

Approximately 10% of the latest offering will be reserved for retail investors, contingent on demand. Sources suggest that the offering could occur as early as June, signaling a swift move to capitalize on current market conditions.



Financial Implications



Since its IPO, Aramco has been a financial powerhouse for the Saudi government, supporting a significant economic agenda aimed at reducing the kingdom’s dependence on oil. This latest share sale is expected to finance large domestic projects aligned with this diversification strategy. Hasan Alhasan, a senior fellow at the International Institute for Strategic Studies, noted that with Saudi Arabia missing its target for foreign direct investment and facing a budget deficit of up to $21 billion, the kingdom is turning to equity sales and debt issuances.

The proceeds from the share sale are likely to be redirected to various sectors including renewable energy, technology, tourism, logistics, and manufacturing. These sectors are viewed as potential drivers of long-term economic growth, helping to reshape Saudi Arabia’s economic landscape.



Market Performance and Future Prospects



Aramco's shares closed slightly lower on Thursday at 29.1 riyals ($7.76), giving the company a market capitalization of approximately $1.87 trillion. This valuation is in line with its performance since the IPO, where shares traded 10% higher on debut, reflecting steady investor confidence.

Despite a nearly 25% drop in profit, Aramco increased its dividends to almost $98 billion in 2023 from $75 billion previously. The company plans to spend $124.3 billion this year, underlining its commitment to robust financial returns and strategic investments.



Aramco's Global Expansion



Beyond the share sale, Aramco has been actively expanding its global footprint. The company has invested in refineries and petrochemical projects in China and other regions, expanded its retail and trading businesses, and entered the liquefied natural gas market. These moves are part of a broader strategy to diversify its operations and reduce reliance on crude oil sales.



Financial Institutions Involved



A consortium of leading financial institutions is managing the share sale, including Morgan Stanley, Citi, Goldman Sachs, HSBC, Saudi National Bank, Bank of America, and JPMorgan. These institutions also played key roles in Aramco’s IPO in 2019, leveraging their expertise to ensure the success of this latest offering.



Saudi Arabia's Diversification Drive



Crown Prince Mohammed bin Salman, often referred to as MbS, has been the driving force behind Saudi Arabia's diversification efforts. Through the kingdom’s sovereign wealth fund, he has directed hundreds of billions of dollars into mega projects and various sectors such as electric vehicles, sports, and aviation. These initiatives are part of a broader vision to create jobs and reduce the economy's dependence on hydrocarbons.


However, lower oil prices and production cuts have posed challenges, impacting economic growth and leading to a fiscal deficit of around 2% of GDP. This deficit is expected to persist, making the share sale a critical component of the kingdom’s financial strategy.



Special Dividends and Market Makers



To attract new investors and provide cash to the kingdom, Aramco introduced a special performance-based dividend last year. Additionally, the company has enlisted more banks as market-makers to improve share liquidity, enhancing the attractiveness of Aramco shares to investors.



Aramco's Market Position



Aramco remains the world's largest oil exporter and trades at a higher price-to-earnings ratio compared to other major global oil companies like ExxonMobil, BP, and Shell. Despite a 12% decline in Aramco's shares this year, ExxonMobil and BP have seen increases of around 14% and 4%, respectively. This disparity highlights the unique market dynamics and investor perceptions surrounding Aramco and its growth potential.



OPEC+ Influence



As the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia plays a crucial role in global oil markets. Aramco currently produces about 9 million barrels of crude per day, adhering to output cuts agreed by OPEC and its allies, known as OPEC+. The group's production policies significantly impact global oil prices, with potential cuts further influencing Aramco's revenues and market performance.



Conclusion



Saudi Arabia's decision to sell a new stake in Aramco is a strategic move to raise significant capital, supporting Crown Prince Mohammed bin Salman’s vision for economic diversification. The anticipated $13.1 billion from the share sale will provide essential funds for domestic projects and initiatives aimed at reducing the kingdom's reliance on oil revenues. Despite challenges such as lower oil prices and a fiscal deficit, Aramco’s robust market position, strategic global investments, and the kingdom’s commitment to diversification underscore the importance of this landmark deal.

This share sale not only represents a pivotal moment for Aramco but also for Saudi Arabia’s broader economic transformation. By attracting a diverse range of investors and enhancing liquidity, Aramco is poised to play a crucial role in the kingdom's journey towards a more diversified and resilient economy.

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