Additional news is emerging about Saudi Aramco’s upcoming IPO suggesting it's possible that the process will take longer than initially thought. Till now, markets have been speculating the IPO will occur during either the second or third quarter of 2018. However, despite the delays, it is becoming increasingly clear that both the company and the Saudi royal family are serious about opening Saudi Arabia’s prized business to the public.
Underwriters have just been selected (J.P. Morgan, Morgan Stanley and HSBC, reports the Wall Street Journal) and oil reserve auditors (Gaffney, Cline and Associates, according to Energy Intelligence) have started auditing Aramco’s oil reserve data. As the process continues, all energy investors need to be asking themselves the following key questions, because an initial public offering of this size and scope will inevitably impact energy markets.
1. Will Aramco truly remake itself into a western-style international energy company?
The Wall Street Journal recently reported that some Saudi officials are pushing for Aramco to go public sooner rather than later. On the other hand, other officials are advocating for more time for the company to follow through with financial reforms recommend by the banks. These changes (such as the rate and means at which the Saudi government taxes Aramco) are necessary to show investors that Aramco is a profitable operation that operates more like BP (NYSE:BP), ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) than like the National Iranian Oil Company.
Some argue that Saudi Arabia will take Aramco public without completing the restructuring because Saudi Arabia needs cash. However, the evidence suggests that even with continued low oil prices, Saudi Arabia’s foreign reserves and proven success in bond sales will provide the country with sufficient cash to meet its budgetary needs for years to come.
Saudi Arabia will likely stay the course with Aramco’s IPO and take the time necessary to restructure the company to achieve maximum investor interest. This will serve Aramco and Saudi Arabia best in the long term. Furthermore, Aramco will need to meet particular disclosure, bookkeeping and financial standards, depending on the exchanges on which Aramco lists. (According to a recent Wall Street Journal report, Aramco is now rumored to be considering New York, London and Toronto exchanges in addition to Tadawul, the Saudi exchange.) This alone indicates a need to move toward the style of a traditional international energy company, rather than a national oil company.
2. Will Aramco reshape itself into a multinational energy conglomerate or will it focus its mission primarily on oil and gas?
Reuters recently reported that Aramco executives are debating whether the company should reshape itself into an industrial conglomerate or retain a primary focus on oil and gas. This discussion specifically concerns whether Aramco will venture into the petrochemicals sphere or whether its downstream operations will remain focused on oil refining. While Aramco is active in the refining business globally, it currently maintains shares in some petrochemical operations run by the Saudi Arabian Basic Industries Company (SABIC) but has not made significant ventures into this sector on its own.
Some argue that concentrating on oil and gas operations will make Aramco shares more valuable because the company’s focus and resources will not be diverted to areas of lesser expertise. Others, however, argue that unless Aramco expands into other sectors, its growth potential will ultimately be limited. An Aramco push into the petrochemicals business could shake up that field with Aramco’s cash resources and easy access to crude and refined petroleum products.
With respect to alternative energy, Aramco has long been an investor in energy technologies, alternative and conventional. In fact, Aramco was an early consumer of solar power technology. Because Aramco already invests in these technologies there is no indication that the IPO will change its strategy or alter this market.
3. How will the IPO affect oil prices?
There is some speculation that the Saudis are deliberately pushing Aramco’s IPO back because, despite OPEC’s agreement to cut oil production, oil prices continue to lag. Higher oil prices would certainly help raise the price of Aramco shares at the IPO.
One indication that the IPO may be further off than previously thought is that Saudi Arabia, via OPEC, has yet to show urgency to significantly raise oil prices in 2017. And just as urgency for higher prices might indicate an impending IPO, investors should keep close tabs on Saudi Arabia’s plans for the Aramco IPO, because that could be a sign that the price of oil will indeed rise.