Saudi Aramco takes key step towards $2tn flotation

Saudi Arabia has taken a key step towards allowing future investors to buy shares in its national oil company, as it prepares for the world’s biggest stock market flotation later this year.

Saudi Aramco was recently forced to deny it was planning to shelve plans for its $2tn flotation of 5% of the company, and the new change suggests the planned IPO is still on track.

A royal decree published on Friday converted the firm into a joint stock company, meaning it can have more shareholders than its current sole shareholder, the Saudi government.

There comes a time in the life of a private company when its original owners want to expand the business, raise funds for acquisitions or simply cash in some of their investment.

One route for doing this is through an initial public offering (IPO), which essentially means moving from being a private business with few shareholders to a public company quoted on a stock exchange.

A prospectus is issued and new shares offered, typically, to financial institutions in the first instance and then, if there is enough demand and the necessary regulatory hurdles have been overcome, the company is listed on the stock exchange. As a public company, any investor can now buy its shares on the open market.

There are some disadvantages for the company. It faces more scrutiny and regulatory demands in the public eye, it could prove a target for a predator via a takeover bid and, if its performance is not up to scratch, its shares can plunge in value.

“This is part of the preparation process for the IPO. You’d expect that to happen,” said a source close to Saudi Aramco. The decree changed the legal status of the oil company from 1 January.

The source said the company was doing everything it needed to deliver the IPO for the Saudi government, which has insisted the flotation is on track for the second half of 2018.

There has been intense speculation over where the international listing will take place, with London, New York and Hong Kong in the frame. The UK government had to deny last November that a $2bn loan to the oil company was tied to efforts to woo Saudi Aramco to list in London.

The kingdom’s top officials hope to list on New York but the company prefers London, but both may be ruled out because of regulatory obstacles, the Financial Times has reported. “No decision has made on the listing,” a company source told the Guardian.

Sceptics have questioned whether the listing will be as great as $2tn, but whatever the final valuation, it will hinge on the oil price. The price of Brent, the international benchmark, reached a two-and-a-half year high this week, at more than $68 a barrel, over the geopolitical uncertainty in Iran.

The buoyant price has been driven in large part by the production cuts led by the oil cartel Opec, where Saudi Arabia is the dominant player, and Russia.

The curbs were recently extended to the end of 2018, but will reviewed in June. Industry observers are keenly watching to see how much the cuts are offset by crude production increases by US shale drillers, driven by the higher oil price.

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Powered by Guardian.co.ukThis article was written by Adam Vaughan, for The Guardian on Friday 5th January 2018 11.29 Europe/London

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