Saudi Aramco ipo price

Why the Saudi Aramco IPO Price Is Now in Doubt

Investors hoping to own shares of Aramco stock are anxious to learn what the Saudi Aramco IPO price will be.

With a potential valuation of over $2 trillion, investors across the world know Aramco is a hugely valuable company. That explains why the New York Stock Exchange and the London Stock Exchange are both jockeying to list the Saudi Arabian oil company when it goes public.

Saudi Aramco ipo priceThe president of the LSE traveled with Prime Minister Theresa May when she visited Saudi Arabia last month. And the head of the NYSE traveled with President Trump on his visit to the kingdom just last week.

While the NYSE and LSE are both hoping to get a slice of the Saudi Aramco IPO, the IPO date might not be until 2019. But that gives investors more time to research the oil company, including what's slowing down the Aramco IPO's progress...

Here's Why Aramco Is So Valuable

The IPO has attracted the attention of investment banks and investors alike because of its massive $2 trillion valuation. That means even if Saudi Arabia sells just 5% of the company on a stock exchange, it will the biggest IPO of all time.

Right now, the largest IPO ever was 2014's Alibaba Group Holding Ltd. (NYSE: BABA). BABA, a retailer based in China, had a market capitalization of $25 billion when it debuted.

But a 5% sale of Aramco would be valued at over $100 billion, four times the size of BABA's current record.

But while the Aramco IPO valuation could break records, it will immediately become the largest publicly traded oil company too. Not only that, but it will be so enormous it will swallow its oil supermajor rivals.

The combined market cap of Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell Plc.  (NYSE: RDS.A), BP Plc. (NYSE: BP), and Chevron Corp. (NYSE: CVX) is about $888 billion. That's less than half of what some believe the Aramco IPO valuation will be.

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The Aramco size is so huge because it has access to all of Saudi Arabia's oil. With 267 billion barrels of oil under its control, Saudi Arabia controls 20% of the world's oil supply. Unlike other Big Oil supermajors, Aramco doesn't have to share its oil supply with any other company. In the United States, Exxon Mobil, for example, has to compete for real estate with every other oil company operating there.

However, Saudi Deputy Crown Prince Mohammed bin Salman says the kingdom will retain ownership over the crude oil wells, and the country will still control oil output. That means, unlike Exxon, Aramco's production could be capped by its home country.

And the tangled relationship between Aramco and the Saudi government is slowing its IPO. It could even weaken Aramco's IPO valuation, which could affect the Aramco IPO price...

The Aramco IPO Price Is in Question

The Aramco IPO valuation of $2 trillion has been turning heads since the company first announced its IPO in 2016, but that value has recently been brought into question.

During the last week of April, Saudi Aramco leaders now say the $2 trillion figure may be, in fact, $500 billion lower, dropping the value down to $1.5 trillion.

While $500 billion is a huge swing, it's also a sign that the price of the Saudi Aramco IPO is highly complicated.

Of course, the price of the Saudi Aramco IPO won't be known until shortly before the IPO itself. IPO prices are usually unveiled right before the IPO happens, not several years before. But it's something investors should keep an eye on.

One of the reasons for the changing value of the IPO is the price of oil.

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When the company announced it was planning to go public on Jan. 8, 2016, the Saudi government explained the IPO was part of the Saudi government's economic reform plan to privatize its economy. But the Aramco IPO announcement also came during the tail end of the oil price crash between 2014 and 2016.

Between its high of $114.81 in June of 2014, the price of Brent crude oil plummeted 70% to $33.55 on the day Aramco announced it was exploring an IPO. Not only does that mean the Kingdom of Saudi Arabia was bringing in less oil revenue, it means that Aramco's value might not be as high when oil prices are so low.

The oil price fluctuation is causing analysts to rethink Aramco's valuation, especially after OPEC's production-cut deal couldn't keep oil prices above $50 a barrel.

Bloomberg reported in March that the Aramco IPO might only be worth $1 trillion now, and Rystad Energy released its updated valuations saying the company could be worth around $1.4 trillion if oil reaches $75 a barrel.

The changing valuation of Aramco isn't the only thing investors need to be aware of either. There are still two big obstacles standing in the way of the Aramco IPO...

The Two Obstacles Holding Up the Aramco IPO

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Money Morning Global Energy Strategist Dr. Kent Moors says the first issue is the company's unique nature.

That's because the public transparency and financial disclosures required by the world's leading stock exchanges mean Saudi state secrets could be exposed to the public. For example, Moors says the Saudi government keeps the number of its oil wells and size of its oil reserves secret for strategic reasons. But if Aramco lists on the NYSE, that could become public information.

But the entanglement between the Saudi government and Aramco goes even deeper. The Saudi government is used to collecting nearly all the revenue created by Aramco, but a tax rate above 90% is not attractive to investors. Saudi Arabia just slashed that tax rate to 50% last month, but that's still more than double what other countries' tax corporations charge. The Organisation for Economic Co-Operation and Development's (OECD) average corporate tax rate is 24.1%.

Aramco's other hurdle is oil's price per barrel. As we mentioned, the IPO's valuation is affected by the price of oil, but with oil trading at $49.55 a barrel the company will need higher oil prices to hit the $1.4 trillion valuation outlined by Rystad Energy.

But to get higher oil prices, Saudi Arabia and other OPEC members have been cutting oil production to weaken oil supply. That sort of effort from OPEC could boost oil prices over the coming year, but it means Aramco will be producing less oil.

Saudi Arabia and Aramco might have to convince potential buyers that this won't limit the company in the future, and potential investors need to be aware of this dynamic with oil prices before jumping into the IPO.

But the desire to own a stake in Saudi Arabia's lucrative oil fields will continue to push Aramco IPO news to the forefront.

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