Aramco’s IPO Comes as Saudi Markets Head for Even Rougher Waters

(Bloomberg) -- 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 following 12 months. They’ve cut them by 13% this year, according to data compiled by Bloomberg.

The Tadawul All Share Index entered a bear market on Tuesday, having fallen 20% from a four-year peak in May. It pared losses in the following two days, but is still down 14% 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 the kingdom’s lifeblood. Fitch Ratings Ltd. subsequently downgraded the company and sovereign’s credit ratings.

Lower oil prices aren’t helping, either. They’re down about 20% 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%. 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 was set to give the official green light for the IPO at a meeting on Thursday. It may sell 2% of the company locally and raise about $40 billion 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 liquidity for Aramco.

Raising $40 billion would increase the bourse’s market capitalization by roughly 8%.

Bloomberg Intelligence values Aramco at $1.1 trillion, in part because of 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.

To contact the reporter on this story: Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Paul Wallace, Justin Carrigan

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