Saudi Aramco IPO

Is the Saudi Aramco IPO Too Big to Fail?

The Saudi Aramco IPO will be the biggest initial public offering of all time, but the IPO process will be incredibly burdensome for a uniquely huge company. And we've identified three major obstacles standing in the way of this oil giant going public...

Today, we're going to break that process down for our readers so they'll be prepared to purchase Aramco shares when they hit the market.

Saudi Aramco is the massive oil company owned by Saudi Arabia. Because the Saudi government owns Aramco, the company controls all of Saudi Arabia's 260 million barrels of proven oil reserves, or 20% of all oil reserves on the planet. That makes the Saudi Arabian oil company the biggest oil company in the world.

Saudi Aramco IPOBut the Saudi government is preparing to sell the company and list it on public stock exchanges. And with an estimated market cap of $2 trillion - nearly six times the size of Exxon Mobil Corp. (NYSE: XOM) - even selling 5% of its shares will make it the biggest IPO ever.

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In fact, if the Saudi government sells 5% of its shares to the public, its projected $100 billion value will be four times the size of the Alibaba Group Holding Ltd. (NYSE: BABA) IPO, which is currently the largest IPO ever.

Unfortunately, the Saudi Aramco IPO date hasn't been decided yet, and it keeps getting pushed back even farther. That's because a slew of complex obstacles stand in the way of the oil giant's public debut.

To help potential investors make sense of the delays, we'll bring you up to speed on the IPO and show you why these obstacles are a cause for concern...

Why Saudi Aramco Is Going Public

Saudi Arabia confirmed it was considering selling shares of Aramco in January 2016, right as oil prices were approaching their 10-year low. And that's very important for understanding Saudi Arabia's motivations...

Crude oil prices plunged from $107.95 a barrel in June 2014 to $26.68 a barrel in June 2016. That's a 75% drop.

An oil price collapse of that magnitude pulls the rug out from an oil-based economy like Saudi Arabia's. Because the Saudi government gets 87% of its revenue from petroleum, when the price of oil falls, the government brings in much less money.

That's the context investors need to consider when they think about Saudi Arabia's decision to hold an IPO for Aramco.

The Saudi government needed money as oil prices crashed, so it decided to sell a chunk of its giant oil company to fill the gap.

That's why investors need to consider whether the Aramco IPO is letting them buy into a lucrative oil company or just helping Saudi Arabia fill its budget gap.

And the oil price crash caused Saudi Arabia to act quickly with the Aramco IPO. By only selling a 5% stake, the government would retain majority control over Aramco, but it's now running into a series of unforeseen problems. Here are the three biggest challenges facing Saudi Aramco, including whether the IPO will happen at all...

Saudi Aramco IPO Challenge No. 1

The first challenge is the tremendous size of the Saudi Aramco IPO.

Saudi Arabia intends to offer a 5% stake in the entire company, not just the oil business. That makes the public offering even more complex because the government can't simply compartmentalize the portion it wants to sell.

And that has global investment banks salivating over the potential fees they can charge to help the company unwind its connections to the Saudi government.

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According to The Wall Street Journal, fees associated with the Aramco IPO could pile up to $1 billion in what it called a "bonanza of fees."

That's why banks like JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) have worked hard to get the underwriting contracts for the IPO, including flying representatives to Riyadh multiple times.

In addition, Saudi Arabia is thought to have plans for significant investments going forward. That means banks are eyeballing futures contracts and fees down the road, too.

But Aramco has two even bigger problems...

Saudi Aramco IPO Challenge No. 2

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The second challenge is choosing which stock exchange(s) the company will be listed on.

Saudi Arabia is planning to sell some shares on its home exchange, but to be truly global, it will have to list shares internationally.

That's why the company is looking at exchanges in New York, London, and Hong Kong.

But choosing a stock exchange is not that simple. Opting for an IPO on the New York Stock Exchange subjects Aramco to the U.S.' laws, including financial transparency law.

Public companies in the United States have to report fully audited financial statements at least once a year, and they have to be transparent about all assets and information that could impact investors.

"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," according to Dr. Kent Moors, Money Morning Global Energy Strategist.

That means the Saudi government must find a way to disentangle itself from the oil company to keep many of its national security secrets hidden. But because Saudi Aramco controls all of Saudi Arabia's oil, it will no longer be able to obscure its oil capacity.

Saudi Arabia's control would be potentially weakened in other ways, as well. Listing on a U.S. stock exchange would place a board of directors in charge of the company. While the Saudi government will be able to appoint the board members because it's the largest stakeholder, the board will still be able to act independently.

But the third challenge is the biggest for the Saudi Aramco IPO...

The Biggest Obstacle for Saudi Aramco

In addition to the legal obstacles standing in the way of the IPO, rising oil prices might be giving the Saudi government cold feet.

Since Saudi Arabia first confirmed it was considering an IPO, crude oil prices have rocketed 84% higher. And Saudi Arabia was able to lead OPEC to its first oil production cut since 2008. Moors says as long as the cartel's deal stays in place, oil prices could rise another 20% this year alone.

With more revenue flowing back into Saudi coffers, the government may not be as willing to give up a portion of its crown jewel.

At the same time, potential dates for the IPO have been pushed back from 2017 to 2019 at the earliest. This gives the government even more time to assess changes to the oil market before pulling the trigger.

And that might mean the Saudi Aramco IPO never happens at all.

But if you're ready to profit from oil stocks now, you don't need to wait for the Aramco IPO. We've got you covered with stock picks that could see double-digit growth this year and could go even higher as oil continues to rebound. These are the best oil stocks to buy in 2017...

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