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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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American Investors Aren't Interested In Aramco

Aramco Oil

For more than a year, Saudi Arabia has claimed that its oil giant Aramco is worth around US$2 trillion, and that its initial public offering will be held in the second half of 2018.

As the date gets closer, speculation has intensified that the Saudis are now thinking of delaying the IPO until 2019 as they struggle to achieve the US$2-trillion valuation that the top Saudi officials are seeking for the Kingdom’s oil firm.

Apart from the very high target valuation of Aramco—which international analysts have questioned since the beginning—the Saudis face another, possibly greater, hurdle to listing the oil giant as early as this year.

It looks like the biggest U.S. hedge and mutual funds—to whom Saudi officials have recently pitched Aramco’s IPO plan in the U.S.—are not very keen on investing in the Saudi oil firm, Bloomberg reports, quoting people familiar with the discussions.

At meetings in New York, Houston, and Washington, Saudi officials have informally discussed with U.S. investors the possibility of buying into Aramco once it goes public. But American investors have raised three key questions regarding the share sale that is expected to be the world’s most valuable IPO in history. The three issues on which U.S. investors have reportedly expressed doubts are the US$2-trillion valuation, the dividend yield that Aramco would be prepared to hand out to investors, and the expectations that soaring U.S. oil production could continue to suppress oil prices over the next few months and years, according to Bloomberg.

Aramco, which hasn’t officially commented on any aspect of the IPO preparations, told Bloomberg that it wouldn’t “confirm or deny whether such meetings took place.”

According to Bloomberg, the Saudis have said that Aramco would pay a higher-than-average dividend yield. But U.S. investors believe that the Saudi oil firm needs to have a higher dividend yield than other oil giants currently pay in order to be an attractive investment.

ExxonMobil currently trades at a dividend yield of 4.1 percent, while Shell’s A shares in New York trade at an implied dividend yield of 6.05 percent. Related: Oil Markets Should Fear A Demand Shortage

Then, the Saudi 10-year U.S.-dollar-denominated sovereign bond yields more than 4 percent currently, so investors could have exposure to Saudi Arabia and get a lot of bang for their buck from a sovereign bond without buying shares of Aramco, Bloomberg’s Javier Blas argues.

According to some of the U.S. investors who spoke to Bloomberg, if Saudi Arabia aimed at a lower valuation for its oil company, it might be able to offer a more competitive dividend yield for the stock.

American investors are also said to be concerned about where oil prices could go in a few months, considering the shale boom and the expectation that OPEC and Russia may not extend their production cut pact beyond the end of 2018.

U.S. investors, and others, could get more information about the Aramco IPO over the next few days during Saudi Crown Prince Mohammed bin Salman’s visit to the U.S.

The Crown Prince will meet with U.S. President Donald Trump in the White House on March 20 to discuss security and economic issues.

Prince Mohammed will also visit Houston, the oil capital of the United States, according to a tentative itinerary for the Crown Prince’s two-and-a-half-week visit to the United States, reported by The National.

The Crown Prince’s visit to the United States comes just a couple of weeks after Saudi Energy Minister Khalid al-Falih hinted that the H2 2018 target date for Aramco’s IPO could slip into next year, calling the targeted period for the listing an “artificial deadline”. Related: Alaska LNG Is Finally Clear For Takeoff

Al-Falih also said two weeks ago that Saudi Arabia was seriously concerned that it ran the risk of potential litigation if it were to pick the New York Stock Exchange for the international listing of Aramco. President Trump has said that he “Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange.”

Recent reports have it that Aramco may list only at home, and that indecision at the highest Saudi government level is reportedly stoking frustration among company executives.

Even if the Saudi Crown Prince—who is overseeing the Aramco IPO—can rally some investment support from the United States, hedge funds are looking at potential yields in an investment, so they might need more than just a charm offensive to commit to buying into the Saudi oil giant.

By Tsvetana Paraskova for Oilprice.com

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