Why these two managers wouldn’t buy Saudi Aramco

Two energy market strategists say they wouldn’t buy into the Saudi Aramco IPO, calling the business too opaque.

Saudi Aramco is planning a public offering for up to 5% of the company, raising about US$100 billion for what would be the biggest-ever IPO. That’s based on Saudi officials’ expectations that an IPO would put about a US$2-trillion price tag on the state-owned oil company.

Two energy sector managers, speaking personally and not for their firms, say they wouldn’t buy the IPO given the mystery that has surrounded Aramco.

To buy, or not

“I wouldn’t ever own that,” says Robert Cooper, who works on institutional equity sales at Acumen Capital Partners in Calgary. “You could own Exxon [Mobil Corp.] and have all the safety of disclosures, U.S. law, and all sorts of other warm and fuzzy things that would make you sleep a lot better at night.”

The Aramco IPO, expected to happen around mid-2018, will be an important indicator for fund flows, investor interest and other market signals, Cooper says.

But, he adds, “This is a really opaque society. They’ve got lots of concerns. They’ve got a war they’re fighting in Yemen that’s costing them a fortune. They’re competing against Iran in various geopolitical spheres. They’ve been decimated by their own [oil supply] strategy for the past two years.”

Cooper doesn’t expect Saudi Aramco’s opaqueness to keep away investors who want in on a “signature asset.” Alibaba Group, he points out, went public with a “very bizarre structure” and still launched a US$25-billion IPO.

Read: Understanding an Aramco IPO

Possible listings

Saudi Energy Minister Khalid al-Falih has said Aramco could list on more than one exchange. While there has been speculation about a listing on the NYSE, Cooper suggests London or Hong Kong as likely places for a secondary listing. Japan and Singapore were also possibilities.

Saudi Aramco has chosen New York investments firm Moelis & Co as its advisor, helping the Saudi oil company with key decisions like selecting underwriters and exchanges to list on.

Tim Pickering, president of Auspice Capital Advisors in Calgary, says there’s “not a chance” he’d personally invest in the Aramco IPO. “As a kingdom that produces oil, it’s always been a mystery,” he says.

Read: Focus on oil facts

As a public company, Aramco will have to become more transparent, though to what degree will depend in part on where it lists.

Diversification

Pickering says the IPO reinforces Saudi Arabia’s strategy of reducing reliance on hydrocarbons as the country’s power is declining in global oil markets.

“I think there’s a bit of a poker game going on in terms of what the reserves are, how long they’re going to last. The answer is nobody knows,” he says. “It’s their chance to still monetize something while the world still values it extraordinarily, when the importance of Saudi oil is becoming less critical.”

Canada accounts for 40% of foreign oil imported into the U.S., while OPEC countries make up 31% and Saudi Arabia is about 11%, according to 2015 data.

“To me, they’ve tipped their hat,” Pickering says. “They want to de-risk themselves.”

by Simon Doyle, an Ottawa-based financial writer.