Aramco To Go Public

Of the behemoths that rule the global markets, none top the beating heart of the Kingdom of Saudi Arabia. The national company named Aramco was originally established in the 1930's as a joint venture by Saudi Arabia and Standard Oil after World War I after the Kingdom granted concessions to the U.S. company over its competition in Iraq. After equity in the company passed through many private portfolios, the government of Saudi Arabia started to build up their own stake in the oil company in 1973 and fully nationalized the entity in 1980.

But after 36 years, the Saudi Arabian Oil Company, formerly known as the Arabian American Oil Company, could find itself in the hands of U.S. financiers once again. A crown prince of Saudi Arabia has recently announced its consideration of an IPO on the New York Stock Exchange. He claimed that this public introduction will be the first step in a process to reduce the nation's dependence on energy revenue. The funds that are raised by auctioning off a stake in Aramco will be diverted to a sovereign wealth fund which will most likely become the basis of a push for independence from oil. In an interview with Bloomberg, crown prince Mohammed bin Salman pointed out that this Public Investment Fund will become "the largest fund on earth." The New York Times reports Norway's Government Pension Fund Global as the current largest at $850 billion.

How The Saudi Public Investment Fund Would Stack Up?
from TheStreet

The same member of the royal Saudi family rejected the proposed output freeze earlier this month because Iran's absence at the negotiation table. This set a precedent for the leader of OPEC a position which put the massive oil producer at the forefront of output changes in the past. The failure of the negotiations only increased the tension in the Saudi government as revenue has fallen significantly with volatile oil prices. With U.S. shale companies encroaching on Saudi Arabia's oil market share, the threatened nation is looking for ways to maximize the value they can get out their oil assets. Whether that's continuing to toss their weight around in the oil energy arena or liquidating those investments for development in other areas of the undiversified Saudi economy, the wary investor may never know. The extra cash from the IPO would bolster any move by the OPEC giant including a possible request for a cut. But if the Saudi government believes in the long-term low oil price scenario, then a push for power could come from swinging financial firepower away from energy assets. Either way, U.S. investors are lining up for the opportunity to claim a parcel of the gargantuan oil firm, and their concern lies mainly with financial figures, not geopolitical gambits. So let's turn to those now.

Aramco vs. Competitors (BoEpd, mn)
from TheStreet
In his interview, the crown prince said that only 5 percent of Aramco's equity would be put up for sale if an IPO was arranged. Typically, selling that amount of market capitalization would be insignificant, but investors have so much more to consider here. The sale of one-twentieth of Aramco would be similar to the sale of 2.25 percent of the contributions to Saudi Arabia's GDP. A Forbes report on the biggest oil and gas companies in the world recorded Aramco's production at 12 million boe/d almost 4 million boe/d over the second place Gazprom (4 million is also about the size of PetroChina, the Chinese oil major). Its girth has helped them dominate the export scene by providing one-tenth of the global oil supply. In the long-term, Aramco reigns supreme with enough barrels of reserves to sustain over 74 years of the annual production in 2014. Did I mention it has one of the largest natural gas reserves in the world at 294 trillion cubic feet? No, I didn't have to because most investors are already sold on the investment. What fund wouldn't with dividends safer than cash itself.

The tantalizing financials come at the expense of investing in one of the most secretive modern nations in the world. Aramco itself is not different from its parent in more ways than one. Opening the pocketbook and revealing financials is currently a privilege the public does not have, but a public offering would require a change in the lack of transparency. So far, the Aramco website has only released corporate reports for the year of 2014 with specific accounting information left out for the "facts and figures" of the year. Wall Street investors won't let opaque financials fly especially in an oil price environment that is so uncertain. The transparency issue come coupled with the potential for conflicts of interest that could worsen over time. The officials of Aramco have asserted that improving the communities of native Saudi Arabia is part of the mission as can be seen by increases in local business over the past couple of years. In 2014, $37.4 billion worth of contracts were awarded to local companies, up from $12 billion in 2010. This commitment is not necessarily a bad thing, but may arise as a point of contention for U.S. investors. This may especially be the case if the Saudi government is looking to migrate away from oil as a basis for their revenue, one of the prime things that investors would be buying into.

Along with the secrets and obscure avenues of investment come the questions of how to value such an entity. As an IPO is considered, this is one of the first questions that investors have to ask themselves, and it proves to be a very tough question to answer. The convolution of its assets is just one reason why valuation is tough; the other is an industrywide problem. Volatile oil prices have caused pricing proven reserves and production capabilities to be a nightmare. TheStreet cites two standards of measure: a straight-up valuation of reserves and enterprise vale to reserve ratio. For Aramco, these figures would land at $2 trillion and $6 trillion respectively with a former senior Aramco advisor Mohammed al-Sabban pinning his bid at $10 trillion. For my estimations, I used recoverable reserves of both crude oil and natural gas along with the yearly averages of those prices to calculate an estimate of the assets investors would be buying into. Due to the steep decline in energy prices, the value of Aramco has dropped from about $20 trillion to a feeble $3.17 trillion, only $158.5 billion of which would be available on the market. This portion of Aramco's value doesn't take into account refinery assets or other valuable sectors of its business operations. While not as high as the Saudi valuation or the steep premium that comes from the enterprise-to-reserve ratio, but it takes more into consideration than the conservative approach mentioned by TheStreet. No matter what valuation technique is used, there's no underestimating the growth that can come from a recovery in global oil prices. This investment is especially inviting for traders who are looking to bet on a bullish oil market in the long-term. It may even be worth the price after institutional investing has pushed the price of equity beyond its IPO value. If the Saudi princes do follow through with this announcement, be on the lookout for more data for fundamental analysis as this company might be a strong pick for the long-term if its stability is can be ensured.


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