Aramco’s I.P.O. Will Be Less Gigantic Than Promised

When Mohammed bin Salman announced in 2016 that he would list one of his country’s crown jewels — the state-owned oil giant Saudi Aramco — on the stock market, he set some audacious goals.

Aramco would be valued at about $2 trillion, easily making it the world’s biggest publicly traded company. Even though the stock sale was bound to be enormously complex, he said it could take place by 2018. And the riches that the offering would generate would help Saudi Arabia wean itself off oil.

Over three years later, Prince Mohammed’s goal finally appears within reach — but in a much smaller, humbler form than first promised. It will probably be valued at a far lower price.

Saudi Arabia is expected to announce within a few weeks that it will formally take Aramco public, selling up to 3 percent of the company’s shares in an initial public offering. It would do so only two months after a devastating assault on two of the company’s key facilities that temporarily suppressed its oil production.

The stock sale will surely be one of the main talking points at the third annual Future Investment Initiative, the conference the Saudi government will host in Riyadh starting Tuesday for corporate moguls and senior government officials from around the world.

But bankers on the transaction have told Prince Mohammed, Saudi Arabia’s 34-year-old crown prince and de facto ruler, that prospective investors would probably value the oil producer at about $1.5 trillion, according to people with knowledge of the matter who spoke on condition of anonymity to describe private conversations.

Though stock exchanges in New York, Hong Kong and London aggressively courted Aramco, the oil company appears fated for now to trade on the much lesser-known stock exchange of its home country, the Tadawul. And Saudi Arabia remains as dependent on its oceans of oil as ever.

It was perhaps inevitable that pulling off the biggest I.P.O. in history would be a long and difficult task. But in the case of Aramco, the yearslong process has faced difficulties in the financial and geopolitical worlds, forcing Prince Mohammed to whittle his ambitions significantly.

The Saudi government has already had to postpone the offering several times, including last year, when it directed Aramco to buy control of a Saudi petrochemical producer, and earlier this month, when it decided to delay announcing the offering by several weeks to incorporate the oil company’s third-quarter financial report, according to the people with knowledge of the matter.

It is still possible that the government could change its mind and delay the offering again, these people added.

Even at $1.5 trillion, Saudi Aramco would be a colossus on global stock markets, with a capitalization far exceeding that of all its major petroleum rivals combined.

Formally known as the Saudi Arabian Oil Company, Aramco was founded in 1933 through an agreement between Saudi Arabia and Standard Oil, and it is widely regarded as a professional, well-run operation.

Its huge resources and scale — it earned $46.9 billion in the first half of the year are and produced 10 million barrels a day — have given it unmatched financial and production advantages. That could give it a leg up on rivals like Exxon Mobil and Royal Dutch Shell with investors.

“There really is a limited pool of capital available for oil and gas equity investments, and there is a chance that Aramco is going to suck some of that up,” said Ben Cahill, research director at Energy Intelligence, a research firm.

Its market debut will still yield billions of dollars, money that Prince Mohammed plans to use to pay for an expansive economic overhaul of the kingdom.

Aramco has already drawn in some private investors and sold $12 billion in bonds this spring amid heavier-than-expected demand.

Yet Aramco’s initial offering, if it finally happened, would take place as climate concerns raise doubts about the future of fossil fuels. Those worries could depress Aramco’s ultimate valuation, analysts say.

For instance, the Singaporean sovereign wealth fund, Temasek, has said that it would not invest in industries dealing with fossil fuels, potentially ruling out an important and respected investor as a participant in an Aramco offering.

The offering would also take place in the shadow of the killing and dismemberment of the Saudi dissident and journalist Jamal Khashoggi by Saudi agents last year. Prince Mohammed recently accepted responsibility for Mr. Khashoggi’s murder, but denied ordering it.

That may not matter as much: Western businesses that had been eager to play down their ties to the Saudi government immediately after the killing quietly resumed business with the kingdom months later. And top government officials like the Treasury secretary, Steven Mnuchin, and executives in the business world like Stephen A. Schwarzman, the chief executive of Blackstone, and John Waldron, the president of Goldman Sachs, plan to attend the Saudi investment conference this week.

Over the past several years, the Saudi government and its army of advisers have toiled to solve many of the potential roadblocks to a successful public offering. Bankers have flown frequently to Aramco’s offices over the years to prepare the company for scrutiny from analysts and investors that comes with being a public company.

Research analysts were flown to Saudi Arabia in late September to be briefed on Aramco’s operations and attend a luncheon with top managers, including the company’s chief executive, Amin Nasser.

The kingdom has also been making changes. It recently made it easier for foreign nonfinancial investors to take stakes in locally listed companies, for example. And this summer, the financial data company MSCI added the Tadawul exchange to its Emerging Markets Index, increasing the flow of overseas money into Saudi stocks.

Last month, the Saudi government replaced Aramco’s chairman of four years, Khalid al-Falih, with Yasir al-Rumayyan, the head of the country’s Public Investment Fund. Mr. al-Rumayyan is a close ally of Prince Mohammed.

And recently, Saudi Arabia has pledged to pay shareholders in Aramco an annual dividend of $75 billion, in a bid to make the company as attractive as possible.

A valuation of $1.5 trillion would give investors a yield of about 5 percent, according to calculations by Energy Intelligence. By comparison, Exxon Mobil, the largest American oil company, now pays a yield of about 4.1 percent, while Shell pays 6.4 percent.

One unforeseen and urgent matter for Aramco’s management team is convincing prospective investors that company engineers have quickly restored production and exports after the that aerial attacks last month temporarily knocked out about half of its production.

Aramco engineers “really know the plants,” said Sadad Al-Husseini, a former Aramco executive vice president. “They know all the valves and pipes and vessels,” he added.

But while the physical damage may have been patched up, the attacks raised a troubling question: How vulnerable are the torrents of oil pulsing through Aramco’s facilities given the growing political tensions between Saudi Arabia and its neighbors, particularly Iran?

“We believe that there is a risk of further attacks on Saudi Arabia, which could result in economic damage,” Fitch Ratings wrote in a research note in which it downgraded Saudi Arabia’s credit rating to A, from A+.