The Saudi Aramco IPO news dominates headlines because of the company's massive valuation, but there are doubts about the company's actual size...
The Saudi Aramco IPO valuation is claimed to be a massive $2 trillion dollars. It's so big that the Saudi government's plan to sell just a 5% stake will still make it the largest IPO of all time - more than four times the size of current record-holder Alibaba Group Holding Ltd. (NYSE: BABA) and its $25 billion 2014 IPO.
But recent Aramco IPO news is calling into question the Aramco IPO value and whether it will even be able to list its shares on stock exchanges in New York or London. Here's everything you need to know about the Saudi Aramco IPO news and what investors can expect next...
Saudi Aramco officials first announced their plans to explore an IPO in January 2016. The company boasted an initial valuation of a landmark $2 trillion.
The massive valuation stems from Aramco's unrivaled access to Saudi Arabia's oil. The Kingdom of Saudi Arabia currently owns Saudi Aramco, and the government only allows Aramco to drill oil and gas in Saudi Arabia. That means Aramco controls 20% of the world's oil reserves, roughly 267 billion barrels of oil.
Other Big Oil companies, like Exxon Mobil Corp. (NYSE: XOM), have to compete for resources by bidding for real estate against rivals. For example, a giant 20 billion barrels of oil was just discovered in the United States' Permian Basin region, but oil companies are competing to control territory there. Exxon Mobil just paid $6.6 billion for resources there earlier this year.
Saudi Aramco doesn't face this problem in competing for the Saudi oil supply.
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That's why the $2 trillion Aramco valuation dwarfs even the world's biggest oil companies. The combined size of Exxon Mobil Corp., Royal Dutch Shell Plc. (NYSE ADR: RDS.A), BP Plc. (NYSE ADR: BP), and Chevron Corp. (NYSE: CVX) is roughly $888 billion. That's less than half of the reported $2 trillion Aramco IPO valuation.
But because Aramco's soaring valuation is tied to the price of oil, analysts have become skeptical of its enormous price tag.
Brent crude oil is currently trading at $47.20 a barrel, near its lowest point since the day before the Nov. 30 OPEC deal when it hit $46.11 a barrel. That's less than half the price Brent crude traded at in 2014, when it hit a high of $115 a barrel in June 2014. With Brent crude now struggling to rise above $50 a barrel, the oil Saudi Aramco controls is now less valuable.
That's why analysts have cut Aramco's valuation nearly in half.
In March, Bloomberg reported analysts were suggesting the Saudi Aramco IPO valuation is closer to $1 trillion. Rystad Energy updated its valuation to $1.4 trillion, assuming oil prices rise to $75 a barrel, which is a 60% gain from today's prices.
But even if the real Aramco valuation is half of the $2 trillion claim, it will still be the largest IPO ever. That means all Aramco news still grabs headlines, including news about which stock exchange it will use to list its shares...
Saudi Arabia plans to list some shares of Aramco on the Saudi Arabian stock exchange, but to maximize the global appeal of Aramco and increase its value, they want to list the bulk of the shares on a major stock exchange in Europe, North America, or Asia.
And stock exchanges in New York and London are heavily competing to win Aramco shares.
The heads of the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE) have taken trips to Saudi Arabia with their respective heads of state to woo Aramco into picking their exchange. In April, the LSE chief executive traveled with UK Prime Minister Theresa May on her state visit to Riyadh. In May, a delegation from NYSE accompanied U.S. President Donald Trump on his official visit to the kingdom.
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The Wall Street Journal reported on June 14 that stock exchanges are so hopeful to land Aramco because it will boost the prestige of their exchanges and could help them win the next big IPO. Selling Aramco stock could be a way for London to keep its global appeal even after Brexit cuts ties with the European Union.
The LSE is also considered the front-runner at this point too. The United States passed a law last year making it easier for American victims of the 9/11 terrorist attacks to sue Saudi Arabia, and listing Aramco shares in the United States could make them vulnerable to a lawsuit.
Plus, the LSE has offered Aramco a deal that could help it over its next biggest hurdle...
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The next biggest obstacle ahead of the Aramco IPO is the disclosure rules for western stock exchanges...
Money Morning Global Energy Strategist Dr. Kent Moors says because the company is owned by the Saudi government, it's reluctant to agree to the transparency required to list on the LSE or NYSE.
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 official number of its oil wells and size of its oil reserves secret for strategic reasons.
If Aramco lists on the NYSE, that could become public information due to U.S. securities law.
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. The OECD average corporate tax rate is 24.1%.
But the LSE has offered Aramco a way out of its problematic connections to the Saudi government. The LSE has offered to create a new listing structure that would allow Aramco to sell shares on the London exchange but wouldn't force it to adhere to transparency laws.
This potential solution has attracted some parts of the Saudi royal family, according to WSJ, even as the LSE is taking criticism for giving Aramco special treatment.
But the desire to own a stake in Saudi Arabia's lucrative oil fields will keep investors on the edge of their seats.
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