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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Can The Saudi Exchange Survive The Aramco Listing?

Saudi Arabia

Last week the chief executive of Saudi Arabia’s stock exchange Tadawul tried to reassure potential investors in Aramco that the bourse will cap the weight of the oil company in the its index to avoid a disproportionate representation of the oil industry. But this sounds easier said than done and it might well be a mixed blessing.

Riyadh eyes US$100 billion in proceeds from the Aramco listing. The figure has been challenged more than once including by internal audits, so the actual proceeds from the listing could be half that amount. Still, most observers are worried that the oil company could overburden Tadawul—a small exchange, in which petrochemical stocks already represent about 25 percent of the index.

Capping the company’s weight is the obvious move to make in these circumstances, but as Saudi expert Ellen R. Wald wrote recently in a story for Forbes, it presents a new problem: if Aramco’s natural dominance on the Tadawul index is artificially limited, some investors interested in buying Tadawul index options because of Aramco’s presence on it might think twice before doing it.

An extension of this problem is the fact that Aramco’s presence in the stock mix on Tadawul would have a positive impact on investor appetite for other stocks listed on the Saudi exchange. Again, if the weight of this presence is limited, the positive impact will be limited as well.

Yet there is no real alternative to this weight-capping. Tadawul’s total market cap to date is around US$500 billion. If Aramco is listed without a weight cap, it could take up about 40 percent of this market cap, according to CEO Khalid al-Hussan as quoted by Reuters earlier this month.

Forty percent of an exchange is too much for a single company, especially one that will be added to an already solid presence of the oil industry on the exchange. This solid presence of oil on Tadawul will without a doubt affect the price movements of non-oil stocks, effectively deepening Saudi Arabia’s dependence on the industry it wants to wean itself from. Related: Is This The End Of Diesel Trucks?

Even with a cap on Aramco’s weight in the Tadawul index, however, the stock market will reinforce the Kingdom’s reliance on oil, Wald notes. In other words, a single listing at home will to an extent betray the purpose of the Aramco IPO: ensuring funds for the diversification of the Saudi economy away from oil.

Yet a single listing at home is what is on the table right now. Talk about an international listing has gradually died off as doubts about the company’s valuation and legal and transparency-related challenges multiplied. Such a listing would have provided more breathing space for Tadawul, or, as Wald puts it, “the burden – or euphoria – from its price fluctuations would be shared.” Yet in its absence, all the burden or euphoria is reserved for the Saudi stock market.

"It is almost doubling the size of the Saudi market and that is definitely changing our position as far as size ... (And) will change the dynamics of how the Saudi capital market — as well as the economy — operates," Al-Hussan recently told CNBC. Whether the change will be for better or worse remains to be seen.

By Irina Slav for Oilprice.com

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