Aramco comes with a lot of baggage
Listing would help Saudis with huge deficit
It may be the worst time for an oil and gas company to seek a public listing, but the world’s largest oil producer is contemplating just such a move.
Saudi Arabian Oil Co., or Saudi Aramco, confirmed Friday it’s studying “various options” to list “an appropriate percentage” of the company’s shares on the market or list a bundle of its downstream subsidiaries.
The news, initially revealed by the powerful deputy crown prince Mohammad Bin Salman Al- Saud, comes at a curious time, as crude oil prices have fallen 45 per cent over the past 12 months and some analysts are not ruling out a drop to the mid- US$ 20s per barrel as early as February.
Despite the poor fundamentals, long- term oil bulls may not be able to ignore the prospect of a stake in a behemoth responsible for a daily output of 10 million barrels — or one out of every eight barrels produced in the world.
Aramco’s crude oil reserves of 261 billion barrels are more than 10 times that of Exxon Mobil Corp., the world’s largest publicly listed oil company. A quick, back-ofthe-envelope calculation suggests Aramco may be worth 10 times more than Exxon’s US$314-billion valuation.
But unlike publicly listed Big Oil, Aramco comes with a lot of extra baggage, to which investors would be wise to pay close attention.
“Aramco is a strange, unique creature, in that it’s a highly professional company with so many assets, but at the same time it’s also subject to what its government wants,” said Matthew Reed, vice- president at Washington, D.C.- based Foreign Reports.
Indeed, the oil giant is the Saudi regime’s biggest economic weapon, helping fund its handouts to thousands of royal princes, keeping its young population content with cradle-to-grave jobs and bankrolling its many political, economic and diplomatic skirmishes around the region.
Aramco’s production prowess also makes Saudi Arabia the most important player in OPEC.
Indeed, Aramco dutifully executed the Saudi rulers’ decision to flood the market with its own output last year even as prices fell. As boards of most publicly listed companies were taking an axe to their budgets, rig counts in Saudi Arabia grew 15 per cent to 20 per cent higher last year, as Aramco pushed on at the government’s behest.
“Sale of shares in the state- run oil company, or units of it, wouldn’t affect Saudi Arabia’s role or status within OPEC,” according to Julian Lee, who once worked for an energy consultancy run by the former Saudi oil minister Ahmed Zaki Yamani and is now an oil strategist with Bloomberg.
Aramco counts BG Group chairman Andrew Gould and former Royal Dutch Shell chairman Mark Moody- Stuart on its board of directors, but analysts believe its prime directive comes from the House of Saud.
Despite the conflict of interest, the monopoly producer may be able to find a balance between shareholders’ economic and the government’s political priorities.
Decades ago the Saudi government listed 30 per cent of another crown jewel, the Saudi Arabian Basic Industries Corp. (SABIC). The company is now a Fortune 500 company with a valuation of US$ 204 billion and annual revenues of around US$ 50 billion in 2014. More recently, Saudi Arabia also listed Rabigh Refining and Petrochemical Co. on the market.
The new regime, led by King Salman bin Abdulaziz Al Saud and his son Mohammad Bin Salman, have pursued an aggressive foreign and economic policy that’s shaken up the political structure. Last year, the government restructured Aramco and removed it from the clutches of the Oil Ministry.
The G20 nation al s o opened its stock market last year to foreign investors, but institutional investors were broadsided by the deteriorating oil- price environment, leaving the market firmly in the red. The government has publicly committed to float major government entities to raise the market’s profile and attract foreign investors.
“The Saudis like the look of a move like this, not just the practical impact or the money it might bring in,” said Reed. “It also sends a message: Saudi Arabia is open for business and that means our biggest companies are open for investment.”
An Aramco IPO would also help the Saudis secure funds to help finance their strategy of dominating regional politics and counter archrival Iran’s impending rise.
Last year alone the kingdom burnt through US$ 104 billion, or 14 per cent, of its foreign reserves, and will be tapping bond markets to finance an expected US$ 98 billion fiscal deficit this year. A partial Aramco flotation could help fill its coffers again.