Saudi Aramco: A deal of the decade

Oil

Oil barrel prices have been stooping to record lows; the Brent futures fell to a low of $33.51 per barrel and the average nationwide price of a gallon of gas is $2.03.

Obviously, as simple economics dictates, the reason why oil prices have plunged to record lows is due to an oversupply of oil far outstripping the global demand for oil. US oil production has doubled, the OPEC cartel, due to their underlying motivation to hold on to their market shares of global oil production, has refrained from cutting production of oil and Russia, despite their economic problems, continues to pour in their share of Oil into the market alongside China. As a result, demand is falling short of supply and has led to a decline in prices of oil.

Saudi Arabia

Saudi Arabia, a country which relies on oil sales for 92.5% of its budget, has been hit particularly hard by this macroeconomic trend. In fact, in 2015, the Saudi Kingdom announced that it faced a deficit of $98 billion and, in order to cover this deficit, tapped into its foreign reserves which, as a result, are down from $728 billion to $640 billion.

In response to this deficit, the kingdom has raised prices on petroleum by 50% to 24 cents (0.90 riyals) for a gallon of petrol. After all, according to Reuters and Saudi-based Jadwa Investment "the Saudi Arabian government spends around $61 billion on energy subsidies annually, almost $11 billion of that on gasoline alone".

Alongside reductions in subsidies, the Saudi government has been considering the privatization of its state-owned oil company, Saudi Arabian Oil Company, better known as Saudi Aramco, as a way to raise funds for the Kingdom.

Saudi Arabian Oil Company

ExxonMobil is the largest privately owned oil company, with a market capital of around $317 billion. However, Saudi Aramco could easily dethrone Exxon for that title.

Saudi Aramco controls about 10% of global oil production on a daily basis, and hoards reserves of 261 billion barrels which is ten times the reserves of Exxon. Given the company's large reserves, the whole of Saudi Aramco could be worth about 20x of Exxon and have a resulting market capital amounting to trillions of dollars. In fact, according to Mohammad al-Sabban, who was a senior adviser to the Saudi oil ministry, has said that Saudi Aramco's value could be more than $10 trillion.

Hence, if the Saudi Arabian government decides to file the company for an Initial Public Offering, Saudi Arabia Oil Company could be the world's first trillion dollar company.

However, before investors and banks around the world jump in excitement to get in the Saudi Aramco action, there are a few finer details that need to be hammered out.

The Fine Details

Before the Saudi kingdom can proceed to proceed with the IPO of Saudi Aramco, the board of directors need to authorize such an action.

Moreover, it is unlikely that the Saudi government will proceed with taking the entirety of Saudi Amarco public as, by doing so, the Saudi kingdom will have to expose a great deal of details of how the company has run which many not be in the Royal family's best interest. Currently, the Saudi Government has revealed very few details about Saudi Aramco and by making the entire company private, how revenues of the company are used in regards to Royal expenses will need to be catalogued as well, a move that I think, the Royal family may shy away from.

Hence, instead of taking the entire company public, the Saudi Government may just take parts of the company public which may have a market capital that is dramatically less than a price tag of a trillion dollars (perhaps somewhere in the $400 billion territory).

Overall

From an overall standpoint, it is going to be quite interesting to see how the entire IPO unfolds.

If it does, the move will be a complete reversal of Saudi Arabia's stance on its industries, as the government has usually favored having companies such as Saudi Armaco under the control of the state.
Moreover, this move is also a glimpse into how oil-dependent countries such as Saudi Arabia are coping with record-low oil prices and the beginning "green revolution" in which an increasing emphasis is being placed on finding sources of energy which are not dependent on hydrocarbons.

So, what do you guys think? Let me know in the comments!

Thanks for reading!

Comments (18)

 
1/10/16

I read about this earlier this week, pretty interesting and would like to hear more insight into this.

Also in your article you mention that Aramco is considering privatization and Exxon is the largest privately held company.......

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1/11/16

I think by privately owned he means non-state owned.

 
1/10/16

I think we'll see the Saudi's hold out until their national sovereign fund is at risk. Only then we may see extreme measures being taken.

 
1/11/16

Google gazprom
Although this investment is probably worse, being a minority offshore shareholder in a still state owned controlled entity, where the nespotic elite are dependent on the company for cash. Atleast Russia has other sources of revenue, and the corruption is more transparent
This has the investment appeal of that North Korean rocket technology IPO, or that spin off from Castro's rum empire

You're born, you take shit. You get out in the world, you take more shit. You climb a little higher, you take less shit. Till one day you're up in the rarefied atmosphere and you've forgotten what shit even looks like. Welcome to the layer cake son.

 
1/11/16

I think you make a very valid point - Saudi's are not going to relinquish control of their national oil company and many of Aramco's future moves are likely going to be politically motivated - hence increasing risks for the investors.

IDK about Gazprom though - Russia's depends on gas exports to Europe and China, but both are starting to get alternatives from elsewhere (LNG exports, renewables)

I'm curious as to what happens with OPEC if (and that's a big if) Aramco goes public... Would be interested to hear your guys thoughts.

 
1/11/16

This is major news (if it goes through) as I believe it hints at signs that Saudi Arabia is expecting to be strapped for cash. An IPO that proves to be a splash will provided much needed relief for the Saudi treasury and help to continue their strategy for preserving market share.

Another point worth noting is that I believe the IPO will be for their midstream side of the business and NOT for their upstream business unit. If it encompasses all elements than I would be very surprised as I cannot see the Saudi government approving such a measure.

As far as Russian entities are concerned such as Gazprom I don't believe the Saudis are that stupid or foolish to make such an offering only to screw investors. They understand the importance of opening up their capital markets to outside investors and they will need to do so if they want to continue playing a major role in international politics.

I'm also curious to see which investment bank will serve as the go-to for such an IPO. HSBC? Goldman Sachs? Perhaps a boutique?

 
1/12/16

HSBC and JP Morgan are the two names that have been floating around.

 
1/12/16

This actually isn't news, not entirely anyway.... they're more likely to spin off some of their downstream assets for which there are already blueprints in a few of Aramco's refining/petchem complexes. Even if they do offer up the golden pot, Aramco isn't just an energy company. As the country's most technically capable institution, they run universities, schools, technology centers and even flood defences for Saudi Arabia. In other words it's a very large, complex and government vehicle. Their upstream asset base is also all located in one country. That's a lot of exposure to a country surrounded by all kinds of risks.

 
1/12/16

I think what they will end up doing is putting some assets- potentially upstream and downstream- in a holding company and sell off some of those shares to the Saudi public only. To me this reads like the Qatar Petroleum IPO which was essentially a method of distributing the country's petroleum wealth to the citizens.

 
1/13/16

The 10 Trillion figure thrown out is pretty absurd. Some rough math: Even using XOM's EV per barrel of reserves (~$14-15) you still only get $3.5Tr. Better comp might be Petrobras which is more like $6 per barrel, meaning 1.6Trillion. But would a prudent investor even pay that for a company with little to no disclosure that is effectively an organ of government policy more so than even PBR? I personally doubt this happens. They might do something with the downstream assets but I don't think they list the whole company.

 
1/13/16
CMS:

The 10 Trillion figure thrown out is pretty absurd. Some rough math: Even using XOM's EV per barrel of reserves (~$14-15) you still only get $3.5Tr. Better comp might be Petrobras which is more like $6 per barrel, meaning 1.6Trillion. But would a prudent investor even pay that for a company with little to no disclosure that is effectively an organ of government policy more so than even PBR? I personally doubt this happens. They might do something with the downstream assets but I don't think they list the whole company.

Saudi Aramco' barrels are some of the lightest, highest quality crude in the world and cost next to nothing to extract. Why would you value you it with XOM's multiple when XOM's reserves are of vastly weaker quality. And I get giving a haircut due to the political risk, but Petrobras? Come on, that's just nonsense.

Regardless, it looks like it'll be the midstream, downstream or international pieces that get hived off. Theres no way they're giving up the crown jewels.

 
1/13/16

Short.

schmooze or lose

 
 
1/13/16

They are probably going to list on the NYSE. ARAMCO actually wants to disincentive all foreign nation investment in oil exploration and maintain price stability. NYSE has the most demands for reporting and is widely accepted. The key to this is reporting their reserves with regularity and absolute transparency. Why would they want to do that? When the actual reserves are released and validated, they will have complete price control and leverage over current OPEC partners. The reserves are more massive that anything you can imagine. They could sell oil at $10 /barrel for 100 years, not run out, and still have major government surplus. Basically, geopolitics.

 
1/13/16

Saudi Arabia is already exerting a lot of power over oil production. The reserve data will just be a cherry on the cake. If Aramco simply wants transparency, there are other ways to achieve that without going through the costly process of NYSE listing. The Trump effect may be a plus for NYSE, though.

 
1/13/16

I think this is priming the pump for the impending ~ $5 bn eurobond deal as it definitely focuses fixed income investors on potential contingent assets for the sovereign (market chatter of ~200 bps for 10 year risk is definitely more than Saudi's are used to paying). Echo other comments that Aramco won't get anywhere near the trillions being thrown around (see discount on Rosneft) so why do this for a measly $10 bn or whatever? At $30 oil the Saudis can easily last for~3 years or so through a combination of tapping FX reserves/SWF, external liquid assets- recent balance of payments data already shows evidence of repatriation of private funds since the oil shock (likely government directed to at tune of ~$40 bn), and bond issuance as debt to GDP is still very low at <10%. By then oil prices should have rebounded with all the supply taken off line/lack of investment(or that is their strategy). That being said, with a 30 year old running the country (who gave the referenced interview) all bets are off.

 
1/13/16

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