Saudi Aramco is reportedly worth over $2 trillion, twice the market cap of Apple Inc. (Nasdaq: AAPL). Aramco controls 20% of the world's proven oil reserves, or 267 billion barrels of oil, and that has investors eager to buy Saudi Aramco stock.
They'll get their chance soon.
The world's biggest oil company is planning an initial public offering soon, and it's going to break records. But investors need to approach the Aramco IPO with caution. The big numbers gloss over some serious issues with the company...
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The Saudi Aramco IPO is projected to be the largest IPO of all time. The company is expected to offer 5% of the company for public sale, and with a total valuation of $2 trillion, the IPO will be worth a record-smashing $100 billion. That's four times bigger than the current record holder, Alibaba Group Holding Ltd. (NYSE: BABA), which debuted at a whopping $25 billion.
In fact, Saudi Aramco's market cap is very likely to be larger than Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell Plc. (NYSE ADR: RDS.A), BP Plc. (NYSE:BP), and Chevron Corp. (NYSE: CVX), combined.
But, at one point, a Saudi Aramco stock offering was supposed to happen already. The Saudi Arabian IPO date has been pushed back by more than a year since it was first announced in January 2016.
That's because the Aramco IPO is much more complicated than a typical IPO, and it means potential investors need to pay careful attention to what's going on...
When Can I Buy Saudi Aramco Stock?
The Saudi Aramco IPO is expected to be the biggest of all time, but its massive size is also making the IPO process difficult. It also means there's no concrete date for the IPO.
The company has had to hire firms to manage the IPO, from advisors to underwriters. This is a standard part of a company going public, but the size of Aramco has made the competition fierce. The Aramco IPO could produce over $1 billion in fees for participating banks. Plus, winning a spot in the IPO process could mean future business with the oil giant.
"Every bank in the world is going to want to have a role in this," reported the Financial Times in January.
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That's why it was a shock when Aramco chose a small boutique investment bank to advise on the IPO. Moelis & Co. (NYSE: MC) beat out investment banks like Goldman Sachs Group Inc. (NYSE: GS) to sign the coveted agreement.
But Aramco went with a more expected approach when it chose its underwriters.
Saudi Aramco chose JPMorgan, Morgan Stanley, and HSBC to underwrite its IPO. That means these Wall Street titans will be promoting the stock and committing to buy shares of it if the public doesn't.
But the next step in the process for Aramco will be deciding which stock exchange to list the company on, and that's a much bigger hurdle to leap.
Aramco will list some shares on the Saudi Arabian stock exchange, but it's also looking to list shares on a major stock exchange with global reach. The company has short-listed exchanges in New York, London, or Hong Kong. But major exchanges like these have public reporting requirements that could open the company up to the public in a way it has never done.
If the Saudi Aramco IPO occurred on a stock exchange in the United States, the firm would need to follow U.S. fiduciary laws regarding transparency and public auditing. It would also have to form a board of directors that could take some power away from the Saudi royal family.
Money Morning Global Energy Strategist Dr. Kent Moors notes that Saudi Arabia was never keen to sell Saudi Aramco because it could mean having to reveal information about the oil fields it would rather keep to itself.
It also means the company will have to disentangle itself from the government. Just last week the Saudi government took a step toward that by announcing it was slashing the tax rate on Aramco from 85% to 50%. That makes Aramco stock more attractive to investors, but shows how deeply reliant the government was on the oil company. The government is expected to make up the difference through dividend payments once the company goes public.
But the biggest hurdle to the IPO might be convincing investors it's a good stock to own in the first place...
Saudi Aramco Stock Might Be Riskier Than You Think
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Investors should be asking themselves why Saudi Arabia is willing to sell its crown jewel oil company.
It's not surprising that Saudi officials confirmed an Aramco IPO was in the works in January 2016. Oil prices crashed from over $100 a barrel in 2014 to below $30 a barrel in January 2016. Because Saudi Aramco's value is based on the vast stores of oil it controls, 267 billion barrels, the crashing price of oil meant Aramco wasn't worth as much as it used to be.
It also meant a lot less money was pouring into the Saudi Arabian government. Roughly 90% of its budget is funded through oil sales. When oil prices fall, the Saudi government gets a lot less money.
Without reform and with no change in the global oil and economic news, Saudi Arabia's deputy economic minister has said that he believes the country may be looking at bankruptcy in three or four years.
And selling a chunk of Aramco to the public would help bring in some much needed revenue.
But oil prices have rallied since January 2016. After hitting their 10-year low of $26.68, WTI crude prices have jumped over 90% to $51.15 a barrel.
While the oil price rally has nearly doubled the value of Aramco, that also means the oil company is worth more to the Saudi government. It's continued the process of arranging the IPO, but it's pushed back the potential date to 2018.
Cheaper prices for renewable energy might also be part of the story here. As renewable energy becomes cheaper, it might become more widely adopted. That could compete with oil's market share and weaken the value of the Saudi crown jewel. That might be why the kingdom is beginning to sell off its oil empire now.
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