Saudi officials and investment bankers weren't considering the risk of devastating drone attacks when they were estimating the value of Saudi Aramco’s upcoming initial public offering (IPO), expected to be world's biggest public offering in history. They don’t have much choice now. Saturday’s attacks on Aramco oil facilities wiped out 5% of global oil supplies and a larger share of Aramco's oil capacity. That has sharply boosted the risk premium attached to owning the company's public shares, which could take as much as $300 billion off the IPO's valuation, according to the Wall Street Journal in a detailed story outlined below.
Depending on who's counting, that $300 billion decline amounts to a slashed valuation of between 15% and 20%. “The most natural thing to happen is to see risk premiums rise which would lower the valuation,” one Saudi official said. “In the current valuation, Aramco does not count for serious attacks like these.”
- Drone attacks wipe out 5% of global oil supplies.
- Increased risk premium could knock $300 billion off IPO valuation.
- Crown prince and advisers expected IPO valuation of $2 trillion.
- Other bankers and Aramco executives expected valuation of $1.5 trillion.
What it Means for Investors
Aramco's valuation has been a contentious issue from the beginning. Crown Prince Mohammed bin Salman, in charge of the Saudi kingdom’s day-to-day affairs, and his banking advisers expected the company to be worth as much as $2 trillion. Even floating just 5% of the company at that valuation would still make it the world’s largest IPO at around $100 billion. The crown prince and his advisers grew especially confident after Aramco raised $12 billion in a debut bond sale back in April.
However, other bankers and a number of Aramco executives estimate the company should be valued closer to $1.5 trillion, with sensitivity to the price of oil being the main risk factor. “We are all well aware of one thing: How Aramco is sensitive to oil price,” one senior Saudi official told the Journal back in early August. “If, let’s say, oil prices are trading at $60 a barrel, there is no way we can get the $2 trillion valuation the crown prince wants. We cannot even get to the $1.5 trillion valuation.”
The recent drone attacks highlight why either of those valuations may be hard to get in the IPO market and even may delay the offering. “These attacks follow a number of others over the last year on Aramco and regional oil-supply-chain assets. But the context has changed with oil prices off their last 12-month peak,” said Hasnian Malik, Tellimer’s head of equity strategy, told the Journal. “All of this suggests greater sensitivity in asset prices to these attacks compared to the precedent ones.”