The Royal Family of Saudi Arabia is about to become the world’s richest; and potentially most powerful, investor. The House of Saud is planning to take that nation’s national oil company; the Saudi Arabian Company or Saudi Aramco, public a move that could raise more than $2 trillion (€1.75 trillion)
The plan is to turn the state-owned oil producer into a holding company and sell shares, Bloomberg reported. If all goes as planned, Saudi Aramco would be the world’s wealthiest company; with a valuation that could be $2.5 trillion (€2.23 trillion) or higher depending on the price of oil.
Despite the value, the Aramco IPO is a move of desperation designed to save the Kingdom from economic collapse. The country’s government nearly became insolvent in Spring 2015, Mohammed Al-Sheikh; a financial advisor to the Saudi government, admitted in a Bloomberg interview in April.
Al-Sheikh thinks the kingdom would have run completely out of money in 2017, if Deputy Crown Prince Mohammad bin Salman; the man behind the IPO, had not cut the nation’s budget by 25%. The Prince has been desperately been trying to reorganize Saudi Arabia’s finances to prevent disaster brought on by the collapse of oil prices.
The prince; the third in line to Saudi Arabia’s crown, hopes to raise enough money to build the foundations of a post oil economy for his country. Most observers think that Aramco would be the largest public offering in history.
Would Aramco be a Good Investment?
The risks Prince Mohammad is taking here are vast because nobody knows if investors would trust the stock he plans to issue. To add to the uncertainty, the value of the company is unknown; Mohammad claims it would be worth around $2.5 trillion, but some observers think it could be far less.
Saudi Aramco would be worth between $250 (€223.05 billion) and $400 billion (€356.87 billion); around 10% of the prince’s estimate, Qamar Energy CEO Robin Mills told CNN. Mills thinks that taxes and the declining value of oil will eat up much of the potential profits from Aramco.
The only way the Prince’s valuations would be justified would be with $70 (€62.45) a barrel oil, Per Magnus Nyvseen of Rystad Energy told CNN Money. Brent crude futures were trading at $46.73 (€41.69) a barrel in London on May 19, 2016.
Despite the fuzzy numbers, Saudi Aramco would still be a huge company, producing 10.3 million barrels of oil a day. Currently the largest publicly-traded oil company Exxon-Mobil (NYSE: XOM) produces around 2.5 million barrels a day. Exxon-Mobil reported revenues of $249.97 billion (€223.02 billion) on March 31, 2016.
Based on Exxon’s revenue figures, Aramco would generate revenues of around $1 trillion (€890 billion). That would give Aramco the world’s largest revenue stream, but not necessarily a high stock price. Walmart Stores Inc. (NYSE: WMT) reported a revenue stream of $482.13 billion on January 31, 2016, but its stock was trading at just $69.21 (€61.75) a share on May 19, 2016.
A major problem will be how the market will react to Aramco shares and if investors would accept them. After all, Aramco would be at the mercy of the Saudi government which could change its policy at any time. Were there to be a revolution; or a new king, in Saudi Arabia there would be no guarantee that the company would stay public.
The management of Saudi Arabia’s finances is also very suspect. Al-Sheikh estimated that around one quarter of the kingdom’s budget, or $80 to $100 billion (€71.37 to €89.22 billion) a year; was wasted between 2010 and 2014, Bloomberg reported.
Another problem is the size of Saudi Arabia’s oil reserves, BP estimated those reserves at 267 billion barrels but some observers think the actual number is far smaller. Nysveen believes it is impossible to tell how much oil the Saudis actually have.
Such figures will not build any confidence in Aramco and could make it a very tough sell to both investors and financial regulators in the United States and Europe. Instead of a new economic giant, Aramco could turn out to be Enron writ large.
The Aramco deal will give Saudi Arabia an incredible amount of power including the ability to borrow large amounts of money. More importantly it will be in a position to acquire other companies.
Whether such moves would be popular or accepted is also hard to say. How would the American people or politicians like Donald Trump; react if Aramco decided to buy Exxon-Mobil or Chevron? Yet such purchases would make sense because they would improve Aramco’s position and give it more control of the market.
Also affected would be the price of oil because it Aramco would be accountable to its stock holders. It would not be able to limit production just to limit prices. Instead there would be a strong incentive to pump more oil to drive prices down and increase sales.
The world after Aramco’s IPO would be a very different place. OPEC would lose most of its power because oil because Saudi Arabia would have no incentive to cut production. Indeed Aramco would have a strong incentive to increase production to drive down prices and force rivals out of business.
Will oil stocks be wiped Out?
This means we will probably enter an age of even cheaper oil and increased market volatility. That volatility and Saudi Arabia’s future could be driven by the price of Aramco stock. The power Aramco will acquire will come at a terrible price because Saudi Arabia will have to relinquish much of its political influence for financial power.
The oil industry is about to be changed beyond recognition. Therefore it might be a good idea for everybody to sell their oil stocks and stay away from this sector until we see if Aramco succeeds. If it fails, the financial and political chaos generated will be incredible and totally destructive.
If Aramco succeeds the value of many oil stocks will be wiped out. Either way vast numbers of investors that do not own a single share of Aramco stock could lose a lot of money. Every investor needs to pay close attention to Aramco because it will change the oil industry and perhaps the world, even if it is not worth $2.5 trillion.