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Saudi Aramco jumps on debut

Daniel Lane

Daniel Lane - Fidelity Personal Investing

State-backed oil firm Saudi Aramco has become the world’s largest listed company, following its stock market debut in Riyadh.

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Shares in the oil producer rose 10% as the oil producer began trading on the capital’s Tadawul stock exchange, giving the firm a market value approaching $1.9tn. This means Saudi Aramco is now worth more than the next five largest international oil companies, ExxonMobil, Total, Royal Dutch Shell, Chevron and BP, combined.

What’s more, the 10% rise above the company’s initial public offering (IPO) price was stunted by the exchange’s daily price fluctuation limit, meaning the initial flurry of buys could well extend into further sessions.

The IPO raised $25.6bn for the company, topping the $25bn generated by Alibaba in its own listing in 2014. But initial orders hit $119bn, meaning the listing was nearly 4.7 times oversubscribed.

Riyadh has made known Prince Mohammed’s ambition to achieve an eventual $2tn valuation for the company and has been encouraging post-IPO participation among citizens and institutions to help get there.

And while the Kingdom is publicising its plans to raise the value of the company, the listing comes amid a broader plan to reduce Saudi Arabia’s reliance on oil.

After having to scale back much more ambitious IPO plans, to allow the country to diversify its assets even further, the region plans to use its new capital for non-energy investments.

Despite owing the lion’s share of its wealth to oil, it seems the Kingdom is taking a longer-term view on the sustainability of its value.

A global shift towards renewable and sustainable energy sources could prove problematic for many of the big oil names. Greater attention to environmental, social and governance (ESG) standards have seen investors take an increasingly active role in holding companies to account for their participation in tackling climate change as well as a range of societal issues.

But while previous generations’ attempts to clean up their investment exposures have largely involved blacklisting many energy firms, we have to question whether this is the best way to handle it.

Engaging with companies and representing shareholders’ interests is an important objective, and has the ability to redirect business practices, to chime with environmental standards and goals.

With the likes of BP and Shell popping up in a large majority of pensions across the country, thanks to their strong histories of consistent dividends, investors will be looking for evidence of their transition to clean energy rather than their demise.

So, how do they navigate the future when the tide is rapidly turning against fossil fuels?

Shell chief executive Ben van Beurden has acknowledged it is a real problem. He says it comes down to finding “a way to preserve that dividend-paying capacity, while at the same time growing the value of the company, while at the same time also changing the make-up of the company.”

BP also said it was reassessing the carbon intensity of its portfolio.

It may take some time for the juggernauts to fully change direction but the intention to diversify away from fossil-fuel based earnings is clear, not least from Saudi Arabia today. The oil majors face a tricky balance of preserving their dividends that investors know them for, while transitioning to make sure they are still relevant in years to come.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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