The biggest risks are tied to Aramco’s core business: oil. Demand growth for crude is slowing — an inconvenient truth for bankers pitching the monopoly at a valuation of up to $2 trillion. Add growing pressure on institutional investors to ditch oil assets they already own, as well as a tough political environment in the Middle East, and the investment case for Aramco weakens.
“It’s hard to see how the company grows over time,” said Anish Kapadia, director of energy at Palissy Advisors, an investment advisory firm based in London.
“We want to get financial investors from all over the world,” chairman Yasir Al-Rumayyan told reporters at a press conference on Sunday.
Global investors are sure to give the company a good look. Aramco, which could reportedly list a stake as large as 5%, sits on massive crude reserves. It posted a $68 billion profit for the first nine months of 2019, a slowdown from the previous year, when annual earnings totaled $111 billion.
“Aramco is the largest and lowest cost producer of oil, and the scale of spare capacity still makes it uniquely strategic in the global oil market,” Hasnain Malik, the Dubai-based head of equity strategy at Tellimer, an investment bank focused on developing markets, wrote in a recent note to clients.
The next few weeks could be tumultuous. Crown Prince Mohammad bin Salman has reportedly sought a valuation for Aramco near $2 trillion. But the model run by Palissy Advisors puts Aramco’s value at just $1 trillion. That’s a massive range — and some investors will worry about overpaying. Some may decide to just stick with existing oil and gas holdings, many of which have been traded publicly for years and offer more transparency.
“There [are] plenty of existing stocks which give exposure to oil,” Malik told CNN Business. “Occupying a minority position in a state-owned oil company may not be that appealing.”
Oil’s dimming outlook
Brent crude, the global benchmark, is currently worth about $62 per barrel. If oil prices were between $70 and $80 per barrel, it would be easy to tack on a few $100 billion more in value to Aramco, Kapadia said.
But prices aren’t headed in that direction. Global economic growth is weakening, reducing demand, and climate crisis fears are escalating. OPEC said in a report published this week that annual demand growth for oil will slump to just 500,000 barrels per day at the end of the next decade, as developed countries shift to renewable sources of energy. Aramco could tighten its grip on supply to boost prices — but not without stoking division among the cartel and allied producers.
“It’s essentially a one product company, and the price of that product is very volatile,” said Tarek Fadlallah, chief executive of the Middle East unit of Nomura Asset Management.
“There are an increasing number of funds that have it as a stated policy that they will not invest in hydrocarbon-related companies,” Fadlallah said. “That necessarily decreases the universe of funds that can invest in the Aramco IPO.”
Aramco could fare better than its peers should climate concerns reduce demand for fossil fuels because its production costs are so low, said Andrew Grant, senior analyst at Carbon Tracker. But the company would still be hit if reduced demand eats into oil prices, making its margins much less attractive.
The Saudi factor
“With any national oil company, the valuation is inextricably linked to the politics of that country,” Kapadia said. He views Aramco as less politically risky than Russia’s Rosneft or Brazil’s Petrobras, but more exposed than the big oil companies based in developed markets.
The murder one year ago of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul chilled international business ties with the kingdom. Relations have only been partially repaired since.
“LGIM is currently reviewing the Saudi Aramco investment case under consideration of business, valuation and corporate governance concerns,” the asset management company said in a statement.