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Aramco shares debut 10% higher in local trade, valuing company at $1.88 trillion

Dubai — Saudi Aramco's shares were trading 10% higher than its initial public offering price shortly after its launch Wednesday, valuing the company at $1.88 trillion, following the record offering of a 1.5% stake in the world's biggest oil producer and most profitable company.

Aramco shares, trading under the symbol 2222, opened at Riyals 35.2 ($9.39) up from its IPO price of Riyals 32,according to the local Tadawul stock exchange. The IPO valued the company at $1.7 trillion.

The shares will be capped at a 10% plus or minus a daily price fluctuation limit.

Aramco's $25.6 billion IPO, which is the world's biggest after Chinese e-commerce giant Alibaba's $25 billion sale in 2014, is a cornerstone of Saudi Arabia's Vision 2030, aimed at weaning the kingdom off its oil income.

Crown Prince Mohammed bin Salman, the mastermind of the vision and the IPO, had initially said the company could be valued at $2 trillion, with a stake sale of up to 5%.

However, lukewarm international investor interest in the IPO prompted the Saudi government to postpone the IPO that was slated to take place in 2018 and make it a local listing rather than an international and domestic flotationas was first touted by the crown prince.

MOST PROFITABLE

The Saudi government, which had initially planned an international roadshow for the IPO, settled for a local and regional roadshow and acquiesced to a valuation of $1.7 trillion.

The government had taken a series of steps to entice both local and foreign investors to subscribe to the IPO.

Aramco announced its intention to grant aggregate ordinary cash dividends of at least $75 billion for 2020, in addition to any potential special dividends.

Saudi nationals will be eligible for bonus Aramco shares under certain conditions.

Aramco posted $68 billion in nine-month net profit, an 18% decline from the year-earlier period. The company was the world's most profitable company in 2018, posting $111.1 billion in net profit.

FOREIGN INVESTORS

The Aramco shares were open to non-resident foreign institutional investors according to Qualified Foreign Investors (QFIs) rules, allowing certain investors to directly own shares in Saudi firms.

But these investors may not be so keen to own Aramco shares due to the risk to long-term dividends from lower oil prices and the risk that capital allocation is driven by the interests of the majority shareholder more than minorities, said Hasnain Malik, head of equity strategy at Tellimer.

"For QFIs outside the passive funds this remains a stock most of them do not feel compelled to own for all the same reasons they shied away from the IPO -- long-term oil price and dividend outlook and alignment of minority and majority shareholders," said Malik.

Aramco's IPO coincides with Saudi Arabia's decision to go above and beyond to lower its oil production through to end of March to help prop up demand for crude and oil prices, which are hovering around $60/b.

LOWER OIL INCOME

Saudi Arabia announced last week its intention to trim its production by 400,000 b/d on top of a production cutas part of a new OPEC+ deal to deepen their cuts to 1.7 million b/d from the current 1.2 million b/d until the end of March amid concern of oversupply in the first quarter of next year.

Under the new deal, Saudi Arabia's quota will be 10.145 million b/d but the kingdom will produce 9.744 million b/d with the surprise additional cut.

Saudi Arabia has been producing under its quota most of 2019 as it led by example within the OPEC/non-OPEC alliance and made up for lax compliance from members, including Iraq, OPEC's second-largest oil producer, Nigeria andto a lesser extent Russia.

Besides its OPEC+ commitments, the IPO trading coincides with the end of expansionary budgets in Saudi Arabia, with expenditure in 2020 set to dip by 2.6% to Riyals 1.02 trillion and amid lower oil income that is set to fall 15%to Riyals 513 billion from 2019.

The 2020 budget assumes a lower oil price than 2019 as the government gets to grips with the current levels of prices hovering around $60/b amid tepid global demand for crude and headwinds from the ongoing trade dispute between the US and China.

-- Dania Saadi, dania.el.saadi@spglobal.com

-- Edited by James Leech, james.leech@spglobal.com