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Matt Winkler
Matt Winkler
Articles (50) 

Why Saudi Aramco IPO Could Be a Big Embarrassment

The Aramco IPO could be a bust no matter the price of oil

October 31, 2017 | About:

Regardless of what the price of oil may be by the time Saudi Arabia finalizes its initial public offering for oil behemoth Aramco, the IPO could easily prove a disaster. To understand why, oil investors need look no further than PetroChina (NYSE:PTR) and Petroleo Brasileiro SA Petrobas (NYSE:PBR).

PetroChina is the Chinese version of Aramco. Enormous and state owned, it was the world’s first $1 trillion company in 2007, but then the late 2008 oil collapse happened, followed by the financial crisis. Ever since then, the stock has been in the doldrums, to say the least. It is still below where it was at bear market bottom in 2009.

Petrobas, another state-owned oil company, is doing just about as badly. Compare these two to multinational oil giants like Chevron Corp. (NYSE:CVX) or ExxonMobil Corp. (NYSE:XOM), and it’s no contest. The majority of state-owned firms are at a clear disadvantage when the going gets tough.

While there is no certainty that the same will happen to Aramco after its own IPO, assuming the IPO still goes forward as planned, state-owned companies flush with special privileges have been known to bust hard once finances are subject to public scrutiny.

As of now, nobody really knows Aramco’s finances clearly. The books are kept private, and though there are rumors of massive waste and cronyism at the giant firm, just how much cannot be confirmed until investors can see Aramco’s finances. Once subject to investor scrutiny, Aramco will be forced to do business a lot differently than it does now. Investors might not like what they see post IPO.

Which raises the question, why go public now? Doing so in the midst of the sharpest and most prolonged oil downturn in decades is not exactly a sign of strength. Beyond that, the measures that the Saudis are taking to raise the price of oil before the IPO are of dubious long-term value. Assuming long and deep oil production cuts can even raise the price to something more palatable for Aramco’s desired $2 trillion valuation, what happens post IPO when production must be ramped up in order to meet revenue targets? Once you go public, you have shareholders to satisfy and can’t bide your time as long as Aramco can.

If and when the IPO hits exchanges, the Saudis will have less reason to artificially support the price of oil with production cuts, which means that Aramco shares could have a difficult time advancing higher post IPO.

It’s more likely that the Saudis are pushing for an IPO now because they want to start cashing out before oil reserves risk drying up. That would hurt Aramco much more deeply than the temporary supply glut now experienced thanks to American shale. The language being used to describe this cashing out has a bit more business diplomacy to it, like “pivoting the Saudi economy away from oil,” but cashing out is basically what it is.

Disclosure: No positions.


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