The concerns may cause fund managers in London, New York and Tokyo to balk at what could be the largest IPO in history, forcing Aramco to rely heavily on rich local families, sympathetic sovereign wealth funds or major customers such as China signing up for shares.
The biggest risks are tied to Aramco's core business: oil. Demand growth for crude is slowing — an inconvenient truth for bankers pitching the monopoly at a valuation of up to $2 trillion. Add growing pressure on institutional investors to ditch oil assets they already own, as well as a tough political environment in the Middle East, and the investment case for Aramco weakens.
"It's hard to see how the company grows over time," said Anish Kapadia, director of energy at Palissy Advisors, an investment advisory firm based in London.
$1 trillion or $2 trillion?
Aramco announced its intention to float shares on the Riyadh stock exchange this week. It made clear it wants this to be a global affair.
"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 are sure to give the company a good look. Aramco, which could reportedly list a stake as large as 5%, sits on massive crude reserves. It posted a $68 billion profit for the first nine months of 2019, a slowdown from the previous year, when annual earnings totaled $111 billion.
"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," Hasnain Malik, the Dubai-based head of equity strategy at Tellimer, an investment bank focused on developing markets, wrote in a recent note to clients.
The company has also committed to a $75 billion annual dividend through 2024. Analysts say what investors earn from the payouts could compete with ExxonMobil (XOM) and Royal Dutch Shell (RDSA), depending on Aramco's valuation. Some potential investors may hold out for even more.
The next few weeks could be tumultuous. Crown Prince Mohammad bin Salman has reportedly sought a valuation for Aramco near $2 trillion. But the model run by Palissy Advisors puts Aramco's value at just $1 trillion. That's a massive range — and some investors will worry about overpaying. Some may decide to just stick with existing oil and gas holdings, many of which have been traded publicly for years and offer more transparency.
"There [are] plenty of existing stocks which give exposure to oil," Malik told CNN Business. "Occupying a minority position in a state-owned oil company may not be that appealing."
Oil's dimming outlook
Brent crude, the global benchmark, is currently worth about $62 per barrel. If oil prices were between $70 and $80 per barrel, it would be easy to tack on a few $100 billion more in value to Aramco, Kapadia said.
But prices aren't headed in that direction. Global economic growth is weakening, reducing demand, and climate crisis fears are escalating. OPEC said in a report published this week that annual demand growth for oil will slump to just 500,000 barrels per day at the end of the next decade, as developed countries shift to renewable sources of energy. Aramco could tighten its grip on supply to boost prices — but not without stoking division among the cartel and allied producers.
"It's essentially a one product company, and the price of that product is very volatile," said Tarek Fadlallah, chief executive of the Middle East unit of Nomura Asset Management.
Additionally, many big institutional investors are under enormous pressure to dump oil assets because of the greenhouse gas emissions they generate and declining performance. 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 recent projects that don't align with the Paris Climate Agreement, which aims to limit the increase in global average temperatures to 1.5 degrees Celsius.
"There are an increasing number of funds that have it as a stated policy that they will not invest in hydrocarbon-related companies," Fadlallah said. "That necessarily decreases the universe of funds that can invest in the Aramco IPO."
Aramco could fare better than its peers should climate concerns reduce demand for fossil fuels because its production costs are so low, said Andrew Grant, senior analyst at Carbon Tracker. But the company would still be hit if reduced demand eats into oil prices, making its margins much less attractive.
The Saudi factor
International investors that don't need to curry favor with Saudi's rulers could also hold out for a cheaper price on shares due to geopolitical risks. Aramco proved in September that it can quickly get production back up and running following a serious attack on its facilities. But the company still operates in a very volatile region and is beholden to its 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 big oil companies based in developed markets.
The murder one year ago of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul chilled international business ties with the kingdom. Relations have only been partially repaired since.
Of course, some are more comfortable stomaching that political risk. China — which counts Saudi Arabia as its No. 1 source of crude oil — is in talks to invest between $5 billion and $10 billion in Aramco's IPO, Bloomberg reported Wednesday.
Sonja Laud, chief investment officer at Legal and General Investment Management, said Monday at a Reuters investment summit that her firm has not yet decided whether to invest in Aramco. "Concerns from a corporate governance viewpoint are well-flagged," she noted.
"LGIM is currently reviewing the Saudi Aramco investment case under consideration of business, valuation and corporate governance concerns," the asset management company said in a statement.
