Aramco’s IPO comes as Saudi markets head for even rougher waters

Anyone buying into Saudi Aramco’s initial public offering in anticipation of a quick rebound in the country’s stock market may be in for a disappointment.

Crown Prince Mohammed bin Salman’s desire to get a $2 trillion valuation for the energy giant comes as analysts slash their earnings-per-share estimates for Saudi companies for the coming 12 months. They have cut them by 13 per cent this year, according to data compiled by Bloomberg.

The Tadawul All Share Index entered a bear market on Tuesday, having fallen 20 per cent from a four-year peak in May. It pared losses in the following two days, but is still down 14 per cent since the end of June, the worst performance globally after Argentina.

Last month’s missile strikes on Aramco’s facilities laid bare the vulnerability of an oil industry that is Saudi Arabia’s lifeblood. Fitch Ratings Ltd. subsequently lowered the company and the government’s own credit ratings.

Lower oil prices aren’t helping, either. They’re down about 20 per cent from this year’s high to $59 a barrel. That’s less than the $80 a barrel the kingdom needs to balance its budget.

“The recent attacks and the low oil prices clearly don’t whet investors’ appetite,” said Ipek Ozkardeskaya, an analyst at London Capital Group, adding that Aramco may not obtain the valuation it’s targeting.

Even the nation’s dollar bonds haven’t escaped unscathed, underperforming emerging markets this month.

The weakness in Saudi assets also reflects wider worries about the economy. The International Monetary Fund on Tuesday lowered its 2019 economic-growth forecast for the kingdom to 0.2 per cent. Among the biggest economies, only Italy will fare worse, it said.

“Investors are concerned about oil prices, which will weigh on Saudi Arabia’s bonds given the dependence of the kingdom’s revenues on oil sales,” said Max Wolman, a senior investment manager at Aberdeen Standard Investments in London.

The Saudi government is set to give the official green light for the IPO at a meeting on Thursday. It may sell 2 per cent of the company locally and raise about $40bn for the kingdom’s sovereign wealth fund. A formal announcement is expected to follow on Sunday.

Some analysts have suggested Saudi investors are selling shares in companies already listed on the Tadawul to build up cash to buy into the Aramco offering.

Raising $40bn would increase the bourse’s market capitalisation by about 8 per cent.

Bloomberg Intelligence values Aramco at $1.1 trillion, in part because it says Saudi Arabia will need to continue limiting crude output as part of its OPEC commitments. Other analysts have calculated the valuation at $1.5 trillion.