Potentially Worth Trillions, But Is Aramco A "Good Deal" For Investors?
Submitted by Nick Cunningham via OilPrice.com,
Saudi Arabia’s deputy crown prince Muhammad bin Salman made headlines this week when he said that the kingdom was considering an IPO of Saudi Aramco, the nation’s state-owned oil company.
In a wide-ranging interview with The Economist on January 4, the deputy crown prince, who is also the defense minister, talked about how he was personally “enthusiastic” about the idea of an IPO. While it still only appears to be a kernel of an idea, rather than a full-fledged plan to privatize the world’s largest oil company, it still made huge news in the world of energy. The correspondent for The Economist, clearly surprised at the comments, pondered whether the government was pushing a “Thatcher revolution for Saudi Arabia.” Deputy crown prince bin Salman responded: “most certainly.” The comments come as Saudi Arabia is looking to scale back pervasive fuel subsidies and has allowed more private sector participation in the economy.
Saudi Aramco produces over 10 million barrels per day (mb/d), which accounts for more than 10 percent of the entire world’s oil output. It sits on 260 billion barrels of oil, which is more than 10 times the reserves of ExxonMobil, the world’s largest publically-traded oil company. ExxonMobil is valued at well over $300 billion, and since Saudi Aramco dwarfs the Texas-based multinational, it may be worth “trillions of dollars,” according to The Economist.
Saudi Aramco is the heart of Saudi Arabia’s economy, and has long-been used both as an instrument of social spending as well as a lever for geopolitical and strategic gain.
An IPO for Saudi Aramco may seem odd then. But Saudi Arabia is reeling from a ballooning fiscal deficit and growing pressure on its currency. Floating some shares could help it tap equity markets to pay for some of Aramco’s operations and ease the pressure on the government during what may turn out to be an extended period of low oil prices. The company confirmed on Friday that such an option was on the table, in order to facilitate “broad public participation in its equity through the listing in the capital markets.”
There are a few ideas that are floating around and all would likely be narrow in scope. One is to partially list downstream assets, while another possibility is listing some upstream production. The Economist says that only around 5 percent of the company might be listed on the Saudi stock exchange, and that the company would not forfeit any control over its operations to shareholders. While the upstream assets would be most attractive to investors, it is also less likely that those would be privatized, even in small amounts. If the company does in fact move forward, the focus will probably be on downstream units first. On Friday, Aramco said it was considering “the listing in capital markets of an appropriate percentages of the company’s shares and/or the listing of a bundle of its downstream subsidiaries.”
But there are reasons to doubt that 1) the Saudi government will actually follow through on the plan, 2) even if some shares are listed, operations will change significantly, and 3) that such a move presents a huge opportunity for investors.
Sure, Aramco might be worth trillions in theory. But returning cash to shareholders is not and will not be the top priority.
Saudi Arabia’s oil assets are first and foremost a strategic asset. The country nationalized the oil industry decades ago and has since then used oil output levels to pursue not just financial interests, but strategic ones. At times that puts political objectives ahead of short-term profits. If flooding the market crashes prices but allows the country to maintain market share even at the expense of revenue (as we are seeing now), that is something that Aramco will pursue.
Conversely, in the past, production was cut to prop up prices.
These decisions are not necessarily bad ones from the government’s perspective, but they would clash with the interest of shareholders. Moreover, Aramco has taken on a variety of social obligations, such as running hospitals. And at the end of the day, revenues are used to fund the state.
The heavy involvement in politics and revenues diverted for social spending presents political risk for investors. That would push down the company’s market value. To take another example, Russia’s state-owned oil company Rosneft produces 5 mb/d, which exceeds ExxonMobil’s 4 mb/d and is about twice that of Chevron’s 2.5 mb/d. However, as Bloomberg notes, Rosneft only has a market cap of $35 billion, while Chevron is worth $160 billion and ExxonMobil is worth about $320 billion. The fact that the Russian government maintains control over Rosneft is a large reason for the disparity.
Perhaps even more important is the fact that nobody really knows the true extent of Saudi Arabia’s oil reserves. While the 260 billion barrel figure is thrown around, the actual data is a state secret.
Despite the fact that all of these factors will limit the ultimate value that Aramco will be able to raise from a listing, Saudi Arabia could still push forward with the idea because of its desperate need for fresh capital. For now though, it is still very early. Saudi Arabia is merely thinking on the idea, so it could be a while before it actually moves on an IPO.
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So what stops the Saudis from chashing in the IPO and then re nationalizing the assets in the near future?
The Russian army.
Not sure about the “army”, but a single Bear-bomber “flying over the cuckoo’s nest" will lay all this IPO nonsense to rest. ;-)
Looney
The whole area there is too unstable right now, I wouldn't touch this one.
Just remember who you are supporting if you buy this stock.
pods
Ever heard of a company going public when what they produce is getting crushed?
Rats leaving a sinking ship?
The bin Sauds are getting ready to bail and are getting their golden parachute ready for deployment.
But it´s a great opportunity to get shares of empty oil wells.
one h bomb in the ME and oil's bear market is over........surely they wouldn't do this
Nothing theoratically prevents that or anything else, but in my view this is nothing more than a bullshit story to feed the news cycle. Oil is low because the saudis are making it low by pumping more of their ( exaggerated ) reserves.
As much as it looks good in print mentally masturbating about having a stake in Saudi oil for some low IQ investor, the reality is, the Saudis are picking up pace in their walk to obsolesence.
They wouldn't dare do so as reneging on your debts/obligations is the cardinal sin of the Western NWO banking cartel (except as centrally planned actions, of course).
Instead, look for them to keep the market over-supplied until they can crush the other players relying on a higher break-even price. After that, they will have market control and can manipulate prices higher, bringing them more profits that they can then buy their stock back with.
I'll offer $1000 for the whole kit and kaboodle. In real money, which may be worth more than trillions of funny stuff.
I won't buy Saudi Stock, but if they have a National Tontine I'm all in.
Today all IPOs sell at the top of their value. The House of Saud is broke and this is a desperate attempt to sucker in other investors to fit their bills.
Their largest oil field - Ghawar - is running near dry. They are pumping it with salt water to get the last remaining oil out. This is causing their technology to carode (salt water causes steel to carode). So they are wrecking their pumps and getting near nothing for it.
Estamates are that more than 90% - and same say 99% - of liquid pumped to the surface is water. Now they do have other oil fields, and some are large, but Ghawar has always been their largest. There will never be a last drop of oil for them, but it looks like their production is topping out, and with it their ROI.
"salt water causes steel to carode" --
It is a bit more complicated than that. There are many anaerobic bacteria in those wells that have been waiting for something to dump electrons to so that they can oxidize all those reduced hydrocarbons (like you oxidize glucose and reduce oxygen to water). Most of those organisms are sulfate reducers. they reduce sulfate to hydrogen sulfide, even moer caustic and explosive (see BP explosion in the gluf...).
+1 thx for the footnote
Yea, like I want to be attached at the hip with a bunch of murdering, thieving, psychopaths... No thanks...
Agree on the first point . An IPO is never in the interest of the company and secondary investors, but an opportunity for the original investors to cash out. Aramco $1tn is way too much. Apparently they still have 260bn barrels of oil in reserves (over 100 years...) they will never get that out , so not point valuating on that.
Oil business is a very simple business,
the complexities of companies like BP shell etc is derived by the huge investments they made to control supply chain, buy new fields and access remote reserves (under water etc where they pay $80 per barrell in costs to get it out)
Aramco has none of this problems. they have producing wells, and pump a lot of barrells per day. As long as the valuation is made on their current cash flow / margin per barrell it can actually be a good deal.
if they evaluate on all sorts of other gimmicks and future extractions / reserves is a scam. hope you guys do not get sucked in
Agree on the first point . An IPO is never in the interest of the company and secondary investors, but an opportunity for the original investors to cash out. Aramco $1tn is way too much. Apparently they still have 260bn barrels of oil in reserves (over 100 years...) they will never get that out , so not point valuating on that.
Oil business is a very simple business,
the complexities of companies like BP shell etc is derived by the huge investments they made to control supply chain, buy new fields and access remote reserves (under water etc where they pay $80 per barrell in costs to get it out)
Aramco has none of this problems. they have producing wells, and pump a lot of barrells per day. As long as the valuation is made on their current cash flow / margin per barrell it can actually be a good deal.
if they evaluate on all sorts of other gimmicks and future extractions / reserves is a scam. hope you guys do not get sucked in
+++
Now those 'other' oil fields just so happen to be where...? Why, on the lower west coast, just where the Saudi (U.S.) F-15's are bombing of course...
Will be the largest failed public offering since Lehman.
Everyone knows that by the time a company goes public in today's world, all the real wealth and earning potential has been sucked out by those in "the club"...
The oil belongs to ALL Saudi citizens, and they should distribute the shares equally among them! Will NEVER happen.
This is just another way for the "princes" and their bankers to milk the cashflows from the oil for the next 30-50 years (and park the proceed in switzerland/gold/etc). They will enjoy the milk and the steaks, and leave the carcass for ordinary Saudis.
The only silver lining is that it will be a step in bringing down the monarchy - now propped by its "ally" - Uncle Sam!
...aaaaaaaaaand they're bailing.
Nothing screams "Peak Value" louder than an IPO
We don't need no stinkin oil...except in my lawnmower, chain saw, car engine, car transmission, differential, mixer gear box, oh and I hear they make gasoline out of it and maybe diesel fuel to move freight is made from oil, but other than that oil is worth very little.
plastics, clothing, advanced polmers, medicines, fertilizers...
I would never support a Saudi company out of principle
I hope you do not live in middle East, otherwise you should expect a death squad out soon
I hope you do not live in middle East, otherwise you should expect a death squad out soon
Shareholders will get a bag of sand for dividends. Now go pound it!
Tey'll take your money to squeeze the last drops out of Ghawar. Before the ipo the low hanging fruit fields that are left will be in some private Sheik abu Allah Bengazi fund. LMFAO!
Before or After "9/11"?!...
Better still....
Before or After Bretton Woods 1971?!!...
Saudi Arabia ain't got it anymore and NEVER WILL moving forward without the control of the rest of the neighborhood outside Iran. Anybody who doesn't know and understand how dry those Saudi reserves are going on 15 years ago need only look at how hard they are trying to destroy Iraq and Syria to find that answer!!!
Pssst... Hey buddy, you interested in a Saudi Oil Company...
funny, how after nearly ~ (1988) thirty years, aramco wants to go public...again ?
could it have something to do with the 'Energy Industrial Complex' via Cheneys'`Haliburton WH Policies of "King Gearge the 43rd,... hence a moral collective responsibility for america's corpororate world to protect american interest...[?]
another reason to go to war for SA's, $1.5- $10 Trillion rainmaker extraordinaire...
curious minds want to know?
Ps. once public i'm sure gas prices will shortly resume their upward movement to $5/gal gasoline. afterall, the they've totally wipe out the shale {Shell?/ Rothschild's anyone?} game!
ladies n gents, recall Vietnam was the worst POS country we ever invaded...now? MFN, trade tourism etc.
I've been doing business w/ SAUDI ARAMCO these thirty years. Best paymaster, technical standards, procedures in the ME. They brought unimagineable change (for the better) to KSA; entire ME in fact.
Roads, schools, hospitals, executive talent this is what Amerika used to do...now?
IMO the best way to open up KSA is to open up the economy
So 40 years after Uncle Sugar throws in the towel, what remains of Arabia's population might be sufficiently hungry to finally swallow their pride and supply cheap labour to the West.
Where there's life there's hope I suppose.
I actually thought that once Europeans finally regain control of their countries, Saudi could re-invent itself as a reservation for European Muslims impossible to return to sender.
If only the Russians were half as dirty as ZATO and the Iranians half as dirty as the Wahhabi's then it would be all over bar the Neocon Hangings.
"Worth trillions" until Ghawar is depleted (at current rates, in about 12 years).
Then it's worth zero.
IPO "investors will have that amount of time to find "a greater fool" to sell to.
Came here to say this.
More likely, Riyadh will try to flog Aramco's subsidiaries with assets outside Saudi Arabia, which are much easier to value (and to retain their value after the homeland runs out of oil, falls into Russian hands, or both), and much easier to pawn as a result.
Only a fool would invest a dime of his own money in the Saudi oilpatch itself while the future of the Kingdom in its current form is at all in doubt (or rather not in doubt---the violent overthrow of the Sauds is not a matter of if, but when). Far better to wait and deal with whoever the Russians appoint to restore order once the Sauds are driven from Riyadh.
(Someone else's, well. Encouraging private investment funds to buy Aramco stock with money ultimately borrowed from central banks would be one way to keep the lights on in Riyadh a little longer without oversight and consultation by elected legislatures concerned about electorates' being on the verge of open revolt against Islam.)
Yep, if the LAZY FAT PIG SODOMITES were sitting on an nerver-ending supply they wouldn't be trying to STEAL Iraqi Oil.
Aramco - Arabian american company?
Do you believe Aramco at that valuation's?? If so? Then by their global networks present? Alphabet's, AAPL, FB, TWTT? Would be a 3-4 T$ worth companies..
Muslims vote 85% Socialist any good investment will be nationalized by the "Islamic state", it's chumpville
<--- Aramco means western hegemoney
Saudi Arabia is broke
No money
So they want to fleece investors
Saudi Arabia is the biggest perperator of terrorism at the behest of Satan America, buying Aramco means funding terror.
Saudi Arabia is dying , its economy is tanking.
DO NOT BUY ARAMCO SHARES