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Banks expected to share tiny proportion of mammoth Saudi Aramco IPO

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The banks that will advise and execute Saudi Aramco’s stock market listing are expected to share a tiny proportion of the $100 billion Riyadh hopes to raise in its initial public offering, according to banking sources and industry insiders.

Investment banks involved in the listing IPO-ARMO.SE are expected to share a fifth of a percent of the money raised, they said, but noted that could still amount to about $200 million.

The listing of 5 percent of the state oil company’s shares could be the largest IPO in history, almost five times the size of current record holder Alibaba (BABA.N), the Chinese e-commerce company which went public in New York in 2014.

Banks are competing fiercely for mandates in the IPO because it is viewed as a gateway to other deals expected to emerge from Saudi Arabia’s plan to revamp its economy via privatization.

Saudi Aramco is known for having paid relatively low banking fees in the past, banking industry sources said. The company declined to comment when asked how much it would offer for this IPO.

The estimate of the fee pot is based on forecasts by industry insiders that have been cross-checked with bankers who are working to grab a share of the pie. They asked not to be named because of the sensitivity of the matter.

Freeman Consulting estimates the pot compares to an average of 2-2.5 percent for IPOs by companies in the region.

International banks JP Morgan (JPM.N), Morgan Stanley (MS.N) and HSBC (HSBA.L) have been appointed global coordinators with more banks expected to be named, in addition to a team of book-runners.

The 35 banks who worked on Alibaba’s $21.8 billion float, led by six main underwriters, pocketed an estimated $300 million among them, according to Thomson Reuters data.

Those jostling for a role in Aramco’s listing are doing it for the status and league table ranking as well as the hope that it will put them in pole position for more Saudi business. Some – such as JP Morgan and HSBC – have been informally working on this since at least 2016.

“This is the IPO of Saudi Arabia, not just Saudi Aramco. Saudi Aramco is very tight and for something of this size in basis points terms it will be the lowest ever,” said one London investment banker with knowledge of the process. “This will set a new precedent.”

An investment banking industry source said it was very unlikely that the fees would reflect the size of the issuance.

“Aramco is known for paying very little fees – for a transaction of this magnitude in the ECM (equity capital market) you are looking at 100 to 150 basis points, but Aramco will pay just 10 basis points,” he told Reuters.

Advisers to Saudi Arabia’s National Commercial Bank IPO, the world’s second-largest after Alibaba at $6 billion in 2104, received just $4.8 million in fees, Thomson Reuters data shows.

According to the data, Aramco, which produces 10.5 million barrels of crude oil per day, has paid out $180 million to advisers globally since 2002. By comparison the biggest corporate fee payer of last year, Japan Post Holdings Co Ltd (6178.T), paid $382 million for investment banking advice, including on its IPO, in 2017 alone.

One of the attractions for banks is a much-coveted top spot on the equity capital market league tables, which are calculated on the basis of deal value as opposed to fees and are included in every client presentation if they make a bank look good.

Being a regional leader will be important for banks such as Citi (C.N) and HSBC, which are expanding their operations in the kingdom, to take advantage of opportunities created by Vision 2030, the reforms launched by Crown Prince Mohammed bin Salman to end the economy’s reliance on oil exports.

“It’s about prestige,” said another banking industry source. He said all the league table places will be taken up by banks involved in the listing because of its size.

“The chief executive and senior management are going to ask questions if you’re not on it.”

 

Reuters



11 Comments on "Banks expected to share tiny proportion of mammoth Saudi Aramco IPO"

  1. MASTERMIND on Wed, 17th Jan 2018 12:23 pm 

    Saudi Arabian oil reserves are overstated by 40% – Wikileaks
    https://www.theguardian.com/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks

    Saudi Arabia’s Energy Minister Warns of World Oil Shortages Ahead
    https://www.wsj.com/articles/saudi-minister-sees-end-of-oil-price-slump-1476870790

    Saudi Aramco CEO sees oil supply shortage coming as investments, discoveries drop
    https://www.reuters.com/article/us-aramco-oil/aramco-ceo-sees-oil-supply-shortage-as-investments-discoveries-drop-idUSKBN19V0KR

    The collapse of Saudi Arabia is inevitable
    http://www.middleeasteye.net/columns/collapse-saudi-arabia-inevitable-1895380679

  2. rockman on Wed, 17th Jan 2018 1:41 pm 

    “The 35 banks who worked on Alibaba’s $21.8 billion float, led by six main underwriters…” For those that don’t understand how IPO’s are typically done the banks are not the big potential moneymakers. It’s those underwriters. Initially stock is not sold to the public. It is sold to the underwriters at a previously negotiated price. This way the company offering the stock knows exactly how much it will receive for its stock. And typically the underwriters pay less then their estimate of what the public will pay in the “retail market”. At that point an underwriter sells a portion or all of the stock it purchased and can make a huge profit in just a matter of days.

    But that doesn’t always happen: the public may not pay more then the underwriters paid. At last not initially. Which is why the underwriters negotiate as low an initial purchase price as possible.

    Of course there will be a huge hype associated with the IPO. But for retail buyers THE question will be is how much they’ll make owning Aramco stock. The first question: what will be the dividend yield? That will be determined by the board of directors which will be controlled by the Saudi govt. The 5% public shareholders will have ZERO SAY in the matter: the majority rules.

    Given how the Saudi govt collects much of the Aramco revenue in taxes and that Aramco pays for all its operational and overhead costs from the remaining revenue there’s no way to estimate what profits Aramco will realize in the future…if any.

    And that will determine the second profit potential for new shareholders: how much can they sell their stock for in the future? If after a year or so and the books show little or no Aramco profit the odds of any dividends becomes very low. At which point there may be very few buyers of the stock and huge amounts could be lost by early shareholders.

    Remember Aramco probably has made little to no profit in the past even when oil was $100+/bbl: the Saudi govt took about 80% of Aramco revenue in taxes and Aramco paid for all operations and overhead out of the remaining income. Which might have left the company with little or no net income…let alone profit.

    Thus the potential absurdity of the huge value of Aramco being tossed around. Even with the promise by the Saudi govt to reduce taxes to 50% from the current 80% Aramco is not the largest beneficiary of the sale of Saudi Arabia oil…it is the Saudi govt.

  3. Boat on Wed, 17th Jan 2018 2:19 pm 

    Canada exports over 3 mbpd to the US. The US net imports 3.5 mbpd. Who needs the worlds imports now. As US production increases Canadian oil will get refined and sold to the world. N American oil dependance is almost gone. Welcome to the new world. Exceptional camel pee with tar sands was the formula to bring energy independance to N America.

  4. Boat on Wed, 17th Jan 2018 2:48 pm 

    Greggiet,

    A year ago I mentioned the US has a chance of becoming net nat gas independant. The eia comfirmed that the US in 2017 was a net nat gas exporter. You continue to live in my world. I was right again. Ps no crash soon. World and US gdp if anything to robust. More correct assumptions.

  5. MASTERMIND on Wed, 17th Jan 2018 3:06 pm 

    Boat

    The US Shale Business is “not profitable” and can’t fund itself whether oil is at 100 or 50 dollars a barrel
    https://imgur.com/a/t7ulB

    MIT Technology Review: Shale Oil Will Boost U.S. Production, But It Won’t Bring Energy Independence
    https://www.technologyreview.com/s/507446/shale-oil-will-boost-us-production-but-it-wont-bring-energy-independence/

    The world’s largest oil trader Vitol says US oil production will peak in 2018
    https://www.reuters.com/article/us-commodities-summit-vitol/u-s-oil-output-may-be-set-for-last-spike-in-2018-vitol-idUSKBN1CF1MZ?rpc=401&

  6. MASTERMIND on Wed, 17th Jan 2018 3:09 pm 

    Boat

    It really helps energy independence when your economy and consumption doesn’t grow for over a decade! Who needs economy growth! And when all of our business’s, stores, and state and local governments go bankrupt. We can just make excuses for everything..

  7. Norman Pagett on Wed, 17th Jan 2018 5:08 pm 

    Saudi oil assets have remained at the same level for years—despite pumping billions of barrels of the stuff

    now they want to sell shares in their sole asset, while still restricting access to the actual oil inventory?

    could the Saudi fuel gauge be getting toward empty?

  8. deadly on Wed, 17th Jan 2018 8:41 pm 

    Somehow it seems the recent purge of Saudi billionaires and the IPO are connected.

    If you didn’t see it, BRKa closed at 317,469 dollars today. Has to be an all-time high for Berkshire.

    Have to be doing something right.

    The corporate fascists got a good thing going.

  9. DerHundistlos on Thu, 18th Jan 2018 4:34 am 

    MUST SEE

    What a Way to Go – Life at the End of Empire:

    https://youtu.be/h2em1x2j9-o

  10. rockman on Thu, 18th Jan 2018 10:49 am 

    Norman – “now they want to sell shares in their sole asset, while still restricting access to the actual oil inventory?” Not picking on you but reemphasizing the point I made above. The Saudi govt will not be offering any access to its oil. They are offering access to the potential profits of a corporation…Aramco. Owning 5% of the Aramco stock does not grant any of those new shareholders ownership of 1 bbl of Saudi Arabian oil. Even more important it does not allow any ability to impact the prices or production rates of Saudi oil. In fact, being a very small minority owner doesn’t allow them to have any impact on the operations of the Aramco company. Aramco may technically soon be called a public company but it will still be controlled entire for the sole benefit of the Saudi govt…the 95% owner.

    IOW if the IPO goes thru nothing meaningful will change in the world’s future.

  11. MASTERMIND on Thu, 18th Jan 2018 10:52 am 

    Norman

    They are also selling their airport as well…Everything must go sale!

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