Saudi Aramco hits $2 trillion market cap, defying valuation sceptics

With Saudi Aramco’s shares rising sharply on their second day of trading, the freshly-listed oil company on December 12 hit the $2 trillion market valuation sought by state leader Crown Prince Mohammed bin Salman.

The Aramco initial public listing (IPO) is at the centre of the Saudi crown prince’s plan to diversify the kingdom’s economy, as per reports by Reuters. This, he aims to do by using the $25.6 billion raised to develop other sectors, in order to draw away the country’s economy from its dependence on oil production.

However, that was much Mohammed bin Salman’s 2016 plan wherein he called for raising nearly $100 billion via international and domestic listings of a 5 percent stake in Aramco.

Aramco was initiated with an “underperform” rating from Bernstein analysts, who estimated its value at around $1.36 trillion. This compares with US energy giant Exxon Mobil’s valuation of less than $300 billion.

“Saudi Aramco is the largest, most profitable oil company in the world – but size is not everything,” they wrote, flagging the risk of slow net income growth if oil prices stay flat.

Bernstein’s note said Saudi Arabian Oil Co (Aramco) should trade at a discount rather than premium to international oil majors, with corporate governance “the key risk for investors” as Saudi Arabia will own more than 98 percent of the company.

“A valuation discount to western oil majors seems warranted,” Bernstein said of Aramco, whose shares gained the maximum 10 percent allowed by the Riyadh exchange on their December 11 debut. They hit 38.7 riyals ($10.32) on Thursday, before easing to 37.5 riyals, putting its market value at $2 trillion.

Aramco has become the world’s biggest IPO, topping the $25 billion 2014 listing of China’s Alibaba, despite limited interest from foreign investors leading it to cancel roadshows in New York and London.

It opted instead to sell just a 1.5 percent stake in Riyadh and rely mainly on domestic and regional buyers.

Some analysts said there could be a lag before the Aramco price settles and some investors take profits from the IPO.

“After Aramco hits $2 trillion, investors will debate: why should it go higher … while its owners value it at $2 trillion?” a Gulf analyst who asked not to be identified said.

The analyst added that when National Commercial Bank (NCB) was listed in 2014 its shares rose by the maximum limit for 10 days before investors started selling.