Saudi Arabia's crown jewel Aramco said it will sell 0.5% of its shares to retail investors in the much-awaited initial public offering (IPO) scheduled for December, which is anticipated to make the company the world's most valuable.
The share offering period for retail and individual investors will begin on Nov. 17 and will close on Nov. 28, according to Saudi Aramco's prospectus released Saturday that includes detailed information about the firm's finances and risks around the IPO.
The offering period for institutional investors will start on Nov. 17 and will close by the end of Dec. 4, the prospectus document running over 600 pages showed. However, Aramco did not furnish information on the percentage of its share it will offer to institutional investors.
During the offering period, institutional investors will be allowed to bid between the minimum and maximum price per share in a range that will be announced soon, according to the prospectus.
"The final share price will be set within this range following the end of the retail subscription period," the prospectus detailed.
A contractual period of 12 months will ensue after trading of shares begins on the Saudi stock exchange Tadawul, which forbids Aramco from selling its shares for a year after the IPO begins.
Aramco will also not be allowed to issue any new shares for six months, according to the prospectus.
-Income higher than Apple, Alphabet, Exxon combined
The document provided information on Aramco's remaining oil reserve volumes -- a question that investors have been asking for a long time since the idea of floating Aramco shares in domestic and foreign markets emerged more than three years ago.
Oil reserve estimates conducted by American consulting firm DeGolyer & MacNaughton put the volume at 209.1 billion barrels of oil equivalent.
While this amount surpasses reserve-rich countries like the U.S., Canada, Russia, Iraq and Iran, it only ranks second in the world after Venezuela, according to BP's Statistical Review of World Energy 2019 report.
Aramco said it had a net income of $111.1 billion in 2018, which was higher than the earnings of Apple, Alphabet (Google) and ExxonMobil combined last year.
The prospectus also showed the company had a free cash flow of $85.8 billion and operating cash flow of $121.0 billion in 2018.
-Riyal currency in transactions
However, there are potential economic, political and security risks for investors that could both hurt Aramco's IPO and its shares thereafter.
The local currency, Saudi riyal, will be used in all purchases, sales and transactions for Aramco shares on the domestic exchange Tadawul. This, however, poses a risk for foreign investors who may not be able to get their hands on enough quantities of riyal to buy the number of Aramco shares they want, which would eventually cause lower demand.
Other risks Aramco noted in its prospectus include uncertainties with supply and demand on the global oil market and fluctuations in crude oil prices.
The document also said, "the Company exports a substantial portion of its crude oil and refined products to customers in Asia, and adverse economic or political developments in Asia could impact the Company’s results of operations."
"The Company’s management team has limited experience managing a public company," it added.
The mechanism for the equalization of compensation that Aramco receives from the Saudi government for domestic sales of certain hydrocarbons may also be subject to changes, the prospectus said.
- Climate change, terrorism risks
Aramco said its public finances are highly connected to the hydrocarbon industry, and the topic of climate change, which is fossil-fuel averse, could have an impact on its operations and finances.
"Climate change concerns and impacts could reduce global demand for hydrocarbons and hydrocarbon-based products and could cause the Company to incur costs or invest additional capital," the prospectus said.
Moreover, political, social instability and actual or potential armed conflicts in the Middle East and the North Africa region could have an impact on the firm's operations and financial position, it said while admitting that "the Company’s facilities have been targeted by terrorist and other attacks."
Drone attacks on two of Saudi Aramco facilities on Sept. 14 caused a production cut of 5.7 million barrels per day (bpd), equal to around 6% of global oil output, and raised concerns about the security of the company's infrastructure.
Saudi Arabia spent $68 billion on defense in 2018, ranking third in terms of expenditure after the U.S. and China. However, when taking into account the GDP of countries, the kingdom is rated as having the largest ratio of defense expenditure to GDP.
If foreign investors' demands are not in line with expectations for Aramco's IPO on Dec. 11, it could hurt the further floating of stocks on foreign stock markets as well.
So far, stock exchanges in Tokyo, Hong Kong, London and New York have been considered for floating Aramco shares in the next couple of years; however, there are concerns about two of these markets as well. Due to Brexit, the London Stock Exchange is regarded as an uncertain market and the U.S. Congress' decision in 2016 to allow American victims and their families to sue the government of Saudi Arabia for Sept. 11 attacks complicates the floating of shares on the New York Stock Exchange.
Saudi Crown Price Mohammed Bin Salman wants the IPO to be successful for his Vision 2030 plan, as he aims to use earnings from the shares sale to invest in other sectors to wean off the Saudi economy's overdependence on oil exports and revenues.
Writing by Ovunc Kutlu
Editing by Anne Akti