Saudi Aramco has delayed its IPO again. 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. However, the risks associated with the Aramco equity investment case are multiple: Some are generic to the entire oil major sector, some are generic to state-owned oil companies and some are unique. Below, we briefly consider these risks, which any valuation of Aramco should reflect.
1. Alternative oil major equities in developed markets are easier to access (no need to set up Saudi trading access), have a long history of disclosure and alignment of majority and minority shareholder interests, transparent ownership, greater free float in percentage terms, longer-standing top management, and diversification across multiple countries and assets.
2. Oil price outlook: Against a backdrop of anaemic global growth, oil prices remain low despite OPEC Plus output restraint, sanctions disruption to Venezuela and Iran, an unprecedented attack on core Aramco assets, attacks on oil tankers off the coast of the UAE and in the Gulf of Oman, risks to output in Iraq and Libya, China build-up of strategic oil reserves, and more debate over the sustainable growth in US shale output.
3. Majority government shareholder versus minorities: Tax rates, dividend stream, acquisitions and capex are all effectively determined by the largest shareholder, the government, which may prioritise value created for the broader Saudi economy and citizen population over the value created for minority shareholders.
4. Aramco bears the burden of OPEC Plus output restraint: Saudi compliance with output targets has not always matched the rest of OPEC Plus.
5. Security: Costs of defence (for Saudi in general and Aramco specifically) are likely to escalate as the US gradually reduces its military commitment to the region (or at least, continues to adopt a more transactional approach to providing that security).
6. Aramco is owned by the Saudi government, which, in turn, is the royal family and that (similar to some of the other GCC national oil companies) links Aramco to risks associated with royal family succession.
These risks, of course, do not prevent a listing of Aramco’s shares, but they do impact the valuation that active institutional investors, who under no compulsion to invest, are prepared to pay.