LONDON / DUBAI (Reuters) – Saudi Aramco's largest asset may also be a liability.
FILE PHOTO: An oil tanker is loaded at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia, May 21
The state energy giant's huge oil reserves – it can sustain today's next 50 levels of production the years – make it more vulnerable than any other company to a rising tide of environmental activism and shifting away from fossil fuels.
In the three years since Saudi Crown Prince Mohammed Bin Salman first proposed an IPO, climate change and new green technologies are putting some investors, especially in Europe and the United States, outside the oil and gas sector.
Sustainable investments make up more than a quarter of all managed assets globally, after some estimates.
Aramco, for its part, argues that oil and gas will remain the core of the energy mix for decades, saying that renewable energy and nuclear power cannot meet growing global demand, and that its crude production has lower greenhouse gas emissions than its competitors.
But with the company again talking to the banks about a listed offer (IPO), some investors and lawyers say the window to conduct a sale at a juicy price is shrinking, and Aramco must explain to potential shareholders how it plans to profit in a lower carbon world.
"Saudi Aramco is a very interesting test as to whether the market is starting to get serious in terms of energy transition risk prices," said Natasha Landell-Mills, responsible for integrating environmental, social and governance (ESG) considerations into investing in London-based asset manager Sarasin & Partners.
“The longer the IPO is delayed, the less willing the market will be to price it favorably because gradually investors will need to question how valuable reserves are in a world that is trying to get down to net zero emissions within 2050. ”
Reuters reported Aug. 8 that Prince Mohammed insisted on a $ 2 trillion valuation, though some bankers and business insiders say the kingdom should trim its target to around $ 1.5 trillion.
A valuation gap can hinder any stock sale. The IPO was previously planned for 2017 or 2018, and when that deadline expired, until 2020-2021.
Aramco told Reuters it was ready for a listing and the timing would be decided by the government.
The company also said it was investing in research to streamline cars, and was working on new technologies to use hydrogen in cars, convert more crude oil into chemicals and capture CO2 that could be injected into reservoirs to improve oil recovery.
Selling the story
Some would argue that this is not enough.
An increasing number of investors around the world place ESG risk in decision making, although the degree of it would stop them from investing in Aramco varies greatly.
Some would exclude the company in principle because of carbon production, while others would be willing to buy if the price was cheap enough to offset the perceived ESG risk – especially given oil companies often pay healthy dividends.
Graphic: Oil still keeps revenue investors sweet – here
At $ 1.5 trillion, Aramco was the world's largest public company. If included in larger stock indices, it would automatically be bought by passive investment funds that track them, regardless of their ESG credentials.
And as the world's most profitable company, Aramco shares would be snapped up by many active investors.
Conversations about a stock sale were revived this year after Aramco attracted major investor need for its first international bond issue. The bond prospectus said that climate change could potentially have a "material adverse effect" on the business.
When it comes to a stock exchange listing, equity investors require more information about potential risks and how companies plan to deal with them, as they are more at risk than bondholders if a business has problems.
"Businesses must lead with the answers in the prospectus, rather than having two or three links describing potential risk from environmental issues," said Nick O'Donnell, a partner in the business department of the law firm Baker McKenzie.
"An oil and gas company must think about how to explain the story over the next 20 years and bring it out in its own section instead of hiding it in the prospectus; it must use it as a sales tool. And when the IPO is completed, each annual report should have a standalone ESG section. "
Unlike other major oil companies, Aramco does not have its own report on how it addresses ESG issues such as labor practices and resources. publishes carbon emissions from the products it sells, but until the year of its bond issue it also kept the economy afloat.
However, the company has an environmental protection department, sponsors sustainability measures and is a founding member of the Oil and Gas Climate Initiative, which is led by 13 top energy companies and has as aims to cut emissions of methane, a potent greenhouse gas.
On August 12, Aramco published for the first time information on the intensity of hydrocarbon mixing 1. The revealed amount of greenhouse gases from each barrel it produces.
Aramco's senior vice president of finance Khalid al-Dabbagh said during an interview this month that carbon emissions from "upstream" exploration and production were the lowest among his peers.
A study published by Science magazine last year found that carbon emissions from Saudi Arabia's crude production were the world's second lowest after Denmark, as a result of having a small number of very productive oil fields.
Aramco says that with the global economy's forecast to double in size by 2050, oil and gas will remain essential.
"Saudi Aramco is determined not only to meet the world's growing demand for plentiful, reliable and affordable energy, but also to meet the world's growing demand for much cleaner fuel," it told Reuters.
"Alternatives still face significant technological, economic and infrastructural barriers, and the history of past energy transitions shows that this trend is taking time."
The company has also moved to diversify into gas and chemicals and uses renewable energy in its facilities.
But Aramco still represents, ultimately, a bet on oil prices.
It generated a net income of $ 111 billion in 2018, over a third more than the total of the five “super-majors” ExxonMobil ( XOM.N ), Royal Dutch Shell ( RDSa .AS ), BP ( BP.L ), Chevron ( CVX.N ) and Total ( TOTF.PA ).
In 2016, when oil prices reached a 13-year low, Aramco's net income was only $ 13 billion, according to the bond prospectus where it first hedged the economy, based on today's exchange rates. Revenue fell 12% in the first half of 2019, mainly on lower oil prices.
Concerns about future fossil fuel demand have outweighed the sector. Since 2016, when Prince Mohammed first flagged a stock exchange listing, the 12-month forward price for earnings for five of the world's top listed oil companies has dropped to 12 from 21 on average, according to Reuters calculations, hanging on to the FTSE 100 and STOXX Europe 600 Oil & Gas index averages .
GRAPHICS: Big Oil Little Loved by Investors – Here
By comparison, UK listed funds investing in renewable energy infrastructure act as wind farms for one of the largest average premiums for net assets.
GRAPHICS: Listed Renewable Energy Funds in Demand – Here
An INFLUX OF CAPITAL
Using a broad measure, global sustainable investment of $ 30.1 trillion was the world's five major markets by the end of 2018, according to Global Sustainable Investment Review here, more than a quarter of all managed assets globally. This compares to $ 22.8 trillion in 2016.
GRAPHICS: More investors are committing to invest in ESG – here.
GRAPHICS: "Sustainable" Investment Fund Launches – Here
"Given the inflow of capital into the ESG space, Aramco's IPO would have been better publicized 5-10 years ago," said Joseph di Virgilio, global equities portfolio manager at New York-based Romulus Asset Management, which has $ 900 million in assets under management.
"An IPO today will still be the largest of its kind, but many asset managers that focus exclusively on the ESG may not participate."
The world's top listed oil and gas companies have come under great pressure from investors and climate groups. in recent years to outline strategies to reduce their carbon footprint.
Shell, BP and others, together with the shareholders, have agreed on carbon reduction targets in some of the operations and on increasing the costs of renewable energy. US big ExxonMobil, the world's top listed oil and gas company, has resisted setting goals.
The UK's largest asset manager LGIM removed Exxon from its £ 5 billion ($ 6.3 billion). Future World funding for what it said was a failure to confront climate change threats. LGIM did not respond to a request for comment on whether it would buy shares in Aramco's potential IPO.
In July, Sarasin & Partners said they had sold nearly 20% of Shell's holdings, and said that consumption plans were in sync with international targets to combat climate change. The rest of the wand is under review.
The asset manager, which has nearly £ 14 billion in assets under management, did not participate in Aramco's bond offerings, and Landell-Mills said they are unlikely to invest in any IPO.
Additional reporting by Ron Bousso in London and Victoria Klesty in Oslo; Editing by Carmel Crimmins and Pravin Char