As the Saudi Aramco IPO Date Nears, 3 Big Obstacles Remain

An official Saudi Aramco IPO date hasn't been announced, but all signs point to an initial public offering in early 2018.

The Saudi oil company was initially eyeing a 2017 IPO date, but CEO Amin Nasser recently told CNN 2018 was better.

"The [oil] market has started to recover, we expect it to recover even more in 2017 and I think the time in 2018 will be almost right," explained Nasser in Oct. 2016.

The Saudi Aramco IPO date is so important, because this will be the largest IPO in history. Aramco could have a $2 trillion market cap by the time it goes public.

An IPO that size will transform the energy markets.

Even though the IPO will be huge, there are major obstacles Aramco has to overcome before its IPO date. Before we examine those obstacles, here's just how huge the Saudi Aramco IPO will be...

The Saudi Aramco IPO Will Be the Biggest Ever

Saudi Aramco ipo dateSaudi Aramco is expected to be valued at $2 trillion dollars when it goes public in 2018. If expectations are accurate, it will be the biggest IPO of all time.

For comparison, Exxon Mobil Corp. (Nasdaq: XOM) is currently valued at $373.91 billion, making it the largest oil company in the United States. Aramco will be worth more than five times Exxon. In fact, Aramco will be worth more than the top "oil majors" of Exxon, Shell, BP, and Chevron combined.

The reason Aramco is so massive is its unparalleled access to Saudi Arabia's oil.

Since the government of Saudi Arabia currently owns the company, Aramco oil company hasn't had to compete with rivals for control of Saudi Arabia's lucrative oil fields. Saudi Arabia has one-fifth of the proven oil reserves in the world, second only to Venezuela.

Through this arrangement, the Saudi Arabian oil company controls 267 billion barrels of proven oil reserves. That's more than seven times the size of proven oil reserves in all of the United States.

Saudi oil could be worth even more as the OPEC agreement to cut oil production goes into effect.

WTI crude oil prices hit a 10-year low of $36.41 a barrel in Jan. 2016. But, the WTI oil price has since risen 45% to $52.79 a barrel today (Jan. 3). The price spiked after OPEC agreed to cut production in November and began implementing it this week (Monday, Jan. 2).

Don't Miss: My (Bold) 2017 Oil Price Forecast - and Today's Most Profitable Energy Play

However, the massive size of the Saudi Aramco IPO is only part of the story. Investors hoping to buy Saudi Aramco stock for the first time need to know a lot more about the company's decision to go public.

And Aramco has three big challenges ahead of the Saudi Aramco IPO date...

3 Challenges Ahead of the Saudi Aramco IPO Date

First, the massive size of Aramco means there is a lot of work to do before the IPO. And that means the actual IPO filing will be a major task.

Saudi Arabia plans to sell a 5% stake in its overall business and not just the oil distribution wing. Aramco initially proposed selling its international business, which would only be a $100 billion deal. Listing the entire business adds difficulty to an already thorny process.

"We need to do a lot of internal work to prepare for this listing. We are listing a part of the entire company, and not just downstream," says CEO Amin Nasser. "People have to appreciate the size of Aramco and its complexity."

Because of the size and complexity of the IPO, the Saudis are soliciting the help of the top Wall St. financial institutions, namely JP Morgan Chase & Co. (NYSE: JPM).

The Wall Street Journal reports other big banks have also been working to be a part of the Aramco IPO.

The fees on a deal this size could total more than $1 billion for banks advising the oil giant.

"Every bank in the world is going to want to have a role in this," reports the Financial Times.

And that doesn't include future business. The Kingdom has plans for major investments in the near future, and big banks will be a key part.

But, the next two hurdles might be the most challenging for the company...

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The second challenge will come when Saudi Arabia decides which stock exchanges to list the company on.

Aramco will be listed on the Saudi Arabian stock exchange, but it is also considering other major stock markets across the world. Where the Saudis decide to list Aramco has far-reaching implications.

"If it decides to list only on the home country exchange, it will be a conservative choice with minimal impact. But if it seeks a listing in New York, London, or Hong Kong, it could be revolutionary," explains Steven Davidoff Solomon, a law professor at the University of California, in the New York Times.

That's because listing Aramco on a major international stock exchange, like the NYSE, will open up the company, and the Saudi government, to public scrutiny.

"Saudi Arabia has been reluctant to sell a percentage of its crown jewel company, because doing so requires revealing important information about the country's oil fields that have been held in secrecy until now," explains Dr. Kent Moors, Money Morning's Global Energy Strategist. Moors has 35 years as an energy policy advisor to 29 governments and nine oil majors across the world.

The Saudis have been reluctant to sell because listing on an American stock exchange would subject Aramco to American fiduciary laws.

These laws include requirements for audited financial statements and make the company's assets public record. If the Saudi government wanted to keep information about its oil reserves or capacity a secret, a listing on an American stock exchange would undermine the government's abilities.

Aramco will also have to create a board of directors to run the company, and shareholders elect these board members. This would further weaken Saudi Arabia's control over the company as investors buy stock.

But, the willingness of Saudi Arabia to be subject to these restrictions leads to its biggest hurdle...

The third hurdle is convincing the public the IPO is necessary in the first place. You see, the official reason for the IPO might be different than what many outsiders think.

"I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco," reasoned Saudi Prince Mohammad bin Salman in Jan. 2016.

But, oil prices hit their 10-year low around the same time, and even with a recent price boost they are still lower than before. WTI crude oil was trading at $90.70 a barrel in July 2014, before beginning a years-long slide to $36.41 in 2016.

And with oil prices so low, the Saudi Arabian economy has suffered.

"If we didn't take any reform measures, and if the global economy stays the same, then we're doomed for bankruptcy in three to four years," says the Saudi deputy economic minister, Mohamed Al Tuwaijri.

That means the Saudi Aramco IPO could be an attempt to raise money for the fledgling economy by cashing out on its biggest asset. More competition from U.S. shale producers and increasingly cheaper renewable energy adds pressure on the Saudi economy too.

The Kingdom may be trying to use the money from the IPO to diversify their economy before their oil becomes less valuable. That might make Aramco stock a riskier investment than its massive valuation shows.

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