Saudi Arabia hopes the oil company is worth $ 2 trillion. Investors are not so sure

Concerns can cause fund managers in London, New York and Tokyo to slow down to what may be the largest stock exchange listing in history, forcing Aramco to rely heavily on wealthy local families, sympathetic sovereign wealth funds or large clients such as China sign up for shares.

The biggest risks are related to Aramco's core business: oil. Demand for crude oil is declining – an impractical truth for bankers turning the monopoly into a valuation of up to $ 2 trillion. Add increasing pressure on institutional investors to ditch oil assets they already own, as well as a tough political environment in the Middle East, and the Aramco investment case is weakening.

"It's hard to see how the company is growing over time," said Anish Kapadia, director of energy at Palissy Advisors, a London-based investment advisory firm.

Aramco announced its intention to float shares on the Riyadh Stock Exchange this week. It made it clear that this wants to be a global affair.
  Saudi Arabia Announces IPO for World & # 39; most profitable company

"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 will surely give the company a good look. Aramco, which reportedly listed a 5% stake, has massive crude oil reserves. It generated a surplus of $ 68 billion for the first nine months of 2019, a slowdown from the previous year, when annual revenue was $ 111 billion.

"Aramco is the largest and lowest cost producer of oil, and the scale of available capacity still makes it uniquely strategic in the global oil market," wrote Hasnain Malik, the Dubai-based equity strategy chief at Tellimer, an investment bank focused on developing markets, in a note to customers.

The company has also committed to an annual dividend of $ 75 billion through 2024. Analysts say what investors earn on payouts can compete with ExxonMobil ( XOM ) and Royal Dutch Shell ( RDSA ) depending on Aramco's valuation. Some potential investors may endure even more.

The next few weeks can be tumultuous. Crown Prince Mohammad bin Salman reportedly sought a valuation for Aramco near $ 2 trillion. But the model run by Palissy Advisors puts Aramco's value at just a billion dollars. There is a huge range – and some investors will worry about paying too much. Some may decide to stick to existing oil and gas stocks, many of which have been sold publicly for several years and offer more transparency.

"There [are] many existing stocks that provide exposure to oil," Malik told CNN Business. "Taking a minority position in a state oil company may not be so appealing."

The dimming prospects of the oil

Brent crude, the global reference index, is currently worth around $ 62 a barrel. If oil prices were between $ 70 and $ 80 a barrel, it would be easy to cope with a few $ 100 billion more in value to Aramco, Kapadia said.

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But prices do not go in that direction. Global economic growth is weakening, reducing demand, and fears of climate crisis escalating. OPEC said in a report published this week that annual oil demand growth will fall to just 500,000 barrels per day by the end of the next decade as developed countries move to renewable energy sources. Aramco could tighten its offer to raise prices – but not without stopping the divide between the cartel and its allied producers.

"It's really a one-man company, and the price of that product is very unstable," said Tarek Fadlallah, chief executive officer of Middle East at Nomura Asset Management.

In addition, many large institutional investors are under tremendous pressure to dump oil assets because of the greenhouse gas emissions they generate and declining results. Norway's giant wealth fund said it would phase out oil and gas stocks earlier this year. According to Carbon Tracker, a think tank, every major oil and gas company, including Aramco, has committed to newer projects not in line with the Paris climate agreement, which aims to limit the rise in global average temperatures to 1.5 degrees Celsius.

"There is an increasing number of funds that have a stated policy that they will not invest in hydrocarbon-related companies," Fadlallah said. "This necessarily reduces the universe of funds that can invest in the listing of Aramco."

Aramco can do better than its peers if climate problems reduce fossil fuel demand because production costs are so low, said Andrew Grant, senior analyst at Carbon Tracker. But the company will still be hit if reduced demand eats into oil prices, making margins much less attractive.

The Saudi factor

International investors who do not need to take advantage of Saudi rulers may also hold out for a lower price of shares due to geopolitical risk. Aramco proved in September that it could quickly start production again after a serious attack on its facilities. But the company still operates in a very volatile region and is looked after by the majority owner, the Saudi royal family.

"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 large oil companies based in developed markets.

The killing of journalist Jamal Khashoggi in the Saudi Consulate in Istanbul a year ago cooled international business ties with the kingdom. Conditions have only been partially repaired since.

Of course, some are more comfortable with stomaching the political risk. China – which considers Saudi Arabia as its first source of crude oil – is in talks to invest between $ 5 and $ 10 billion in Aramco's IPO, Bloomberg reported Wednesday.
Sonja Laud, chief investment officer in Legal and General Investment Management, said Monday at a Reuters investment stop that her firm has not yet decided whether she wants to invest in Aramco. "Concerns from a corporate management standpoint are well-flagged," she noted.

"LGIM is currently evaluating the Saudi Aramco investment case while assessing business, valuation and corporate governance issues," the asset management company said in a statement.

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