“This is going to be a game-changer, particularly for institutional investors” – Jim Harden
In the oil and gas industry, ExxonMobil (ticker: XOM) has long been the 800-pound gorilla. It’s the world’s preeminent publicly-owned oil company, but that is about to change. Somebody three times its size (production) is moving toward an IPO.
The new public oil and gas company waiting in the wings to steal Exxon’s crown is, of course, Saudi Aramco. Rumors have been kicked around as to where the stock will trade—including the NYSE and the LSE, but Aramco is expected to hold an initial public offering of common stock as early as 2018.
It is worth examining just how big Saudi Aramco is, when compared to the current giants in the oil and gas industry. According to its 2016 Annual Review, Aramco produced 10.5 MMBOPD and 12 Bcf/d in 2016, a combined 12.5 MMBOEPD.
ExxonMobil, the current largest public producer, had comparable gas production of 10.4 Bcf/d, but significantly less oil production, 2.4 MMBOPD. At a combined 4.1 MMBOEPD, ExxonMobil has less than one-third of Aramco’s production.
Aramco reserves are similarly massive. The company reports its 2016 year-end oil recoverable reserves are 260.8 billion barrels, with an additional 298.7 Tcf of gas. At the end of 2016, ExxonMobil held about 20 billion BOE of proved reserves, a mere 6.4% of Aramco’s reported value. Even if one considers Exxon’s total “resource base” Aramco still looms large. ExxonMobil’s 91 billion BOE resource base is only 30% of Aramco’s reported numbers.
Massive production and reserves encourages a similarly massive valuation, and Aramco hopes to be valued at $2 trillion. Even if the market accepts only half of this value, the company will still be the largest firm in the world, by market cap. Aramco plans to offer 5% of the company, for a proceeds target of $100 billion.
Aramco will be defined by staying power
Hein Principal Jim Harden
According to Hein Principal Jim Harden, investors may look more favorably on Aramco than on the current oil supermajors. Hein said Aramco’s sheer size gives it a staying power that the public supermajors cannot match. “I kind of know that Saudi Aramco is going to be around in 50 years,” Harden told the Energy Finance Discussion Group at a breakfast presentation today in Denver. “I’m not 100% sure about whether the others will be difference-makers from a market capitalization perspective.”
“This is going to be a game-changer, particularly for institutional investors,” Harden continued.
While an IPO will provide needed funds to help replenish the cash reserves of the Kingdom of Saudi Arabia, it also constrains them to abide by securities and fair trade laws—no more price fixing
However, after it goes public Aramco may not be able to swing its weight around like it usually does. U.S. antitrust laws prohibit price fixing, which is exactly what Aramco and other OPEC producers have attempted to do for the last 60 years. If authorities sue Aramco for price fixing, Aramco may lose its ability to alter prices.
Tom Petrie, founder of Petrie Partners, spoke on the topic of the Aramco IPO at the EnerCom Dallas investment conference in February 2017.
“There’s a determined effort to bring Saudi Aramco public,” Petrie told the EnerCom Dallas audience.
“This really is transformational if they can pull it off,” Petrie said. “The deputy crown prince who is now 32 years old is beginning to put into place a dramatic set of changes: cutbacks in subsidies to the Saudi citizens, looking to instill the notion that work in itself is a worthy activity—that’s not part of the historic Saudi culture.” Petrie pointed out that this is not just the deputy crown prince talking to the royal family and the extended family of about 30,000-40,000 people but rather it’s talking to 19 million citizens of Saudi Arabia. “And we still have the last vestiges of ten sons of the founder of the country of almost 120 years ago, a number of whom are less than fully committed to the changes that the deputy crown prince is putting forth.
“That said they made the decision and they’re fully committed,” Petrie said. He said that when they first put forward the idea of selling a part of Saudi Aramco there was a lot of talk in the West about selling the downstream, selling the midstream, selling the tankers or the refineries, “and then it became clear—‘no, we’re talking about selling 5% of the company and by the way we think it’s worth $2 trillion dollars at the price we want to get for that 5%.”
Petrie said that valuation of the company will be center stage. “Wood Mackenzie has come out with a controversial report as far as the Saudis are concerned that the company would be valued at far less than the $2 trillion.”
