A giant among giants: meet the $2 trillion oil company preparing its IPO

A giant among giants: meet the $2 trillion oil company preparing its IPO

As far as most investors know, ExxonMobil (NYSE: XOM) is the biggest energy company in the world. Indeed, Exxon is a huge company—it has a market capitalization of $368 billion. But there is an oil company far bigger than Exxon. In fact, it is more than five times bigger than Exxon, and it is in the process of preparing its initial public offering. That company is the Saudi Arabian Oil Company, otherwise known as Aramco, which is planning its IPO for as early as next year.

Aramco plans to sell 5 percent of its shares, which value the company at roughly $2 trillion. And, recent news reports suggest that Saudi Aramco could be willing to list shares on the New York Stock Exchange, which would be a change from recent policy. Aramco’s IPO would be five times as large as any other IPO in history. Once Aramco goes public, it will instantly become not just the most valuable publicly-traded energy company in the world, but the most highly valued of any company in existence.

The planned IPO is huge news for the oil markets and energy investors.

Tapping into Saudi oil

Saudi Arabia is the world’s largest oil exporter, and it has largely resisted calls from other OPEC nations to cut production, despite the persistence of extremely low oil prices.

Brent crude, the international benchmark for oil prices, currently sits at $47 per barrel, down from a high of well over $100 per barrel back in 2014. This has put a great deal of strain on Saudi Arabia’s federal budget, as the country generates the vast majority of its tax revenue from oil. In fact, last year Saudi Arabia swung to a record $98 billion budget deficit. This means the country is strapped for cash, and is for the first time selling a piece of its prized state-owned oil company to try to raise cash to plug the hole in its finances.

Many would say this move is overdone. Saudi Arabia has become addicted to oil, and its over-reliance on the commodity is the reason why it is suffering such a steep deficit. It is critical for the country to expand its economy beyond oil, and fortunately the Saudi government is finally realizing that reality. Last month, Saudi Deputy Crown Prince Mohammed bin Salman said that ownership of Aramco and some other national assets would be transferred to a public fund that invests cash from the country's oil and gas operations into other sectors.

Furthermore, in a program titled “Saudi Vision 2030”, Saudi Arabia’s government has come up with a plan to enact regulatory, policy, and budget changes over the next 15 years. A key tent pole of this policy will be to embrace privatization in a way Saudi Arabia never has before, and a key part of that will be to sell a piece of its state-owned oil company in the public markets. According to The Telegraph, Aramco is by far the biggest oil and gas producer in the world.

Is the age of oil over?

Investors trying to read between the lines of Saudi Arabia’s major move toward a more diversified economy could infer that at its core, the rationale is that Saudi Arabia is preparing for the end of oil. While that scenario seems far-fetched, and would likely only play out over the long-term, it’s not unfeasible. Saudi Arabia has seen the collapse in demand for commodities like coal, and with the rise of renewable sources of energy like wind and solar, it must be wondering whether oil is the next coal.

To that end, analysts are beginning to ponder the same question. In an interview with Bloomberg, analyst Andrew Logan of Ceres said, “The most obvious way to read it is they are starting to see the writing on the wall -- that the age of oil is coming to an end and they are looking to cash out while they can.”

As a result, environmentalists could actually have reason to view the Aramco IPO as a positive event. It could signal a major shift in global energy policy. The notion that Saudi Arabia, the biggest oil producer in the world, is actually interested in breaking its own addiction to oil, is a watershed moment and as a result could conceivably be viewed as progress for the climate change movement.

Implications for investors

Private investors may now have the opportunity to own a piece of the largest energy company in the world. However, whether retail investors should rush out to buy shares of Aramco, if and when it goes public, is a different question. Fundamentals are key, and as with every other major oil company, Aramco’s earnings are likely in steep decline. Moreover, one of the saving graces of investing in the energy sector in light of painfully low oil prices—dividends—are not guaranteed.

The burden of Saudi Arabia’s distressed budget, and the fact that Aramco is still vastly majority state-owned, mean the likelihood of dividends is relatively low, due to royalty fees and taxes. For example, the Saudi Arabia constitution states that Aramco’s 260 billion barrels of estimated reserves belong to the kingdom. As a result, it’s best for investors to take a wait-and-see approach with regard to Aramco’s IPO.


Companies to watch

BP (NYSE: BP): In addition to ExxonMobil, Aramco is hoping that other integrated oil majors purchase some of its shares when it conducts its initial public offering. BP, along with Chinese oil producer Sinopec (NYSE: SHI), have reportedly had interest in acquiring a stake in Aramco.

Gazprom (OTCMKTS: OGZPY): Gazprom, the world’s second-largest producer behind Aramco, could be seen as a case study for state-owned oil companies and a reason for investors to be cautious before buying shares in Aramco. Gazprom has been stuck in a tug-of-war with shareholders, who do not feel their interests are being taken seriously enough. The Russian government still exercises a great deal of control over the company, even though Gazprom is publicly traded. 

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance. 

Originally published on May 17, 2016