Attacks on Saudi oil risk lowering Aramco IPO valuation

By Shaji Mathew, Filipe Pacheco and Sarah Algethami on 9/15/2019

DUBAI (Bloomberg) - As bankers discussed Saudi Aramco’s initial public offering at the Ritz Carlton hotel in Dubai last week, a drone attack was being planned to hit the heart of its operations over the weekend. It caused Saudi Arabia to halve its oil output and may cut the valuation of Aramco’s milestone deal.

The giant oil producer has accelerated preparations for a share sale that could happen as soon as November in Riyadh. Dozens of bankers from Citigroup Inc. to JPMorgan Chase & Co. met last week to work on the deal, with analyst presentations initially scheduled for next week, people familiar with the matter have said.

“Crown Prince Mohammed bin Salman will push the company to demonstrate that it can effectively tackle terrorism or war challenges,” analysts led by Ayham Kamel, head of Middle East and North Africa research at the Eurasia Group, said in a report. “The attacks could complicate Aramco’s IPO plans.”

In an attack blamed by the U.S. on Iran, a swarm of drones laden with explosives set the world’s biggest crude-processing plant ablaze. Floating a minority stake of the oil giant, officially known as Saudi Arabian Oil Co., is part of Prince Mohammed’s efforts to modernize and diversify the economy.

The attacks underscored geopolitical tensions in the region. Iran denied responsibility, which was instead claimed by Iranian-backed Houthi rebels in Yemen.

The main Saudi stock index fell as much as 3.1% shortly after opening on Sunday, leading losses in the Gulf. It partially recovered and was down 1.1% as of 12:48 p.m. local time.

Back in 2017, investors suspected that Saudi government-related funds swooped in to support the market after the imprisonment of local billionaires at the Ritz-Carlton in Riyadh. That also happened amid the international crisis following columnist Jamal Khashoggi’s murder at the Saudi consulate in Istanbul.

Here’s more from analysts and investors:

Eurasia Group

“The latest attack on Aramco facilities will have only a limited impact on interest in Aramco shares as the first stage of the IPO will be local. The international component of the sale would be more sensitive to geopolitical risks”

Al Dhabi Capital, Mohammed Ali Yasin

“I think this attack may delay the IPO even on the local exchange, and could affect the valuation negatively, as the investors have seen a live demonstration of the risk levels of the future revenues and business of the company. That was very low prior to this weekend attack”

“Aramco has one main source of revenue, oil. That is its strength, but now it is becoming its biggest weakness if it gets disrupted.”

United Securities, Joice Mathew

This “will force investors to go back to the drawing board and re-evaluate their risk models on Aramco”

“Even though this is a rare event, which could be potentially categorized as 4 or 6 sigma levels, the geopolitical risk premium on Aramco’s valuation model would show a sharp increase”

“As far as the pricing is concerned, my view is that there may not be much of an impact if the government is contemplating a 1% listing on the Tadawul. I think the government has the power and ability to influence the decisions of anchor investors there.”

Tellimer, Hasnain Malik

“Ultimately the security risk is not so acute that it outweighs oil price, oil output and free float drivers of the valuation”

This attack “also provides an opportunity for Aramco to demonstrate the redundancy and resilience of its supply chain by minimizing disruption to customers and thereby helping to mitigate the valuation impact of this risk.”

Qamar Energy, Robin Mills

“It will be all but impossible to proceed with the IPO if there are ongoing attacks”

“Valuing Aramco like Shell or ExxonMobil gets us to about $1.2-1.4 trillion. But that would drop significantly if we apply company-specific risk factors.”

Al Ramz Capital, Marwan Shurrab

“I don’t see a substantial hit on valuation.”

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