- REUTERS/Ahmed Jadallah
- Saudi Aramco filed its prospectus late Saturday, giving potential shareholders a new look at the company’s performance before its initial public offering.
- The state-owned company is set to float the largest IPO in history, and the prospectus details a number of risks the firm anticipates moving forward.
- Aramco faces pressure from political unrest in the region, armed conflicts, climate change movements, government ties, and future oil demand.
- Even the size of the offering could pose issues for traders, as any IPO of this size is “unprecedented,” Aramco wrote.
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Saudi Aramco published its prospectus late Saturday, detailing several risks the state-owned company anticipates.
The oil conglomerate’s public debut is set to be the largest IPO in history. Though the prospectus didn’t suggest a valuation, Crown Prince Mohammed bin Salman has previously stated Aramco should be valued at $2 trillion.
Bankers have had a harder time estimating the company’s worth, offering valuations ranging from $1.1 trillion to $2.5 trillion. A closer estimate should arrive November 17 when individual investors can begin bidding on shares. The process ends December 4 and will yield a final offer price ahead of a larger public sale.
The prospectus details how the share offerings will take place, and is meant to market the shares to potential investors. Here are six key risk factors highlighted in the document and how they could drag the company’s valuation lower in the future.
Two Aramco facilities were forced to cut production after September 14 drone attacks crippled much of the company’s infrastructure. The strikes reportedly led Aramco to delay its IPO as it looked to give investors more detail around how the attack harmed revenues, and the conglomerate cited additional attacks as a key risk moving forward.
The September attacks prompted a 20% spike in oil’s price per barrel – the most on record – and led Aramco to slash more than half of its daily barrel production. CEO Amin Nasser told CNBC on October 9 that the firm would return to “maximum sustained capacity” by the end of November.
September’s drone strikes weren’t the only time Aramco has been the focus of armed conflict this year. Unmanned aerial vehicles targeted the East-West pipeline in May, and the Shaybah oil field was damaged in August attacks. Additional attacks from terrorists, rebels, or other armed forces “could have a material adverse effect” on Aramco’s revenue stream and the world’s oil supply as a whole, the prospectus said.
- Charlotte Greenfield/Reuters
Recent global protests against climate change have increased public scrutiny of oil producers, and Aramco’s large footprint in the industry leaves it particularly vulnerable to a mass movement toward sustainable energy. Aramco cited governments’ pressures to reduce greenhouse gas emissions as a critical threat to oil demand, and called the landscape of GHG-emission laws “difficult to predict with certainty.”
The oil conglomerate also noted that the mix of domestic and international climate policies such as the Paris Agreement establish several different paces for the development of green-energy laws. Any significant shift away from hydrocarbon-based fuels could force Aramco “to incur costs or invest additional capital,” according to the prospectus.
The company’s prospectus included an industry assessment from consulting firm IHS Markit, which showed oil demand starting to contract as soon as 2035. Though Aramco didn’t specifically endorse the findings, their inclusion points to a major hurdle down the road.
A second projection – which takes a faster move to renewables into account – suggests peak oil demand will arrive in the late 2020s. Such a deadline would give Aramco less than a decade to diversify its revenue stream and move away from hydrocarbon fuels.
The company’s chief executive previously wrote off renewable energy as a threat to Aramco’s main product, attaching additional significance to the IHS study. He deemed the move to renewables as “not based on logic and facts,” and said their popularity was “formed mostly in response to pressure and hype” during a February 26 speech.
Political and social instability
- STR New/Reuters
Aramco’s prospectus highlights the significance of the Middle East and North Africa region as both a hub for its operations and for many of its customers. Yet years of political unrest in the area could cripple key efficiencies.
The company cites the Suez Canal and the Straight of Hormuz as critical shipping routes for its crude oil business. Four oil tankers were sabotaged near the Straight of Hormuz in May 2019, and a British oil tanker was seized by Iranian forces in the same area in July. The two routes are “subject to political or armed conflict from time to time,” Aramco noted, adding that heightened tensions could endanger large deliveries.
Conflict in areas around Saudi Arabia also threaten Aramco’s production. The prospectus highlights numerous ongoing conflicts and warns they could impact the company’s facilities, infrastructure and reserves.
“Armed conflict is currently ongoing in Yemen, Iraq, Syria and Libya,” the company wrote. “Such social unrest and political and security concerns may not abate, may worsen and could spread to additional countries.”
The fuel industry is “the single largest contributor to the Kingdom’s economy,” according to the prospectus, and Aramco plays a key role in driving the Saudi government’s income. The oil sector accounted for 63% of the government’s total revenue in 2017, and the nation “is expected to continue to rely on royalties, taxes and other income” from the industry.
The document warns that any major headwinds to Aramco’s business could drag the nation’s GDP, payments, trade policies, and cash reserves. Additionally, any government funding shortfalls could lead the nation to shift tax policy and collect more from Aramco’s revenue. Higher taxes could put pressure on dividends, buybacks, or other shareholder-friendly actions, and drag Aramco share prices lower as investors grow less interested in the firm.
The offering’s size
Aramco’s IPO will begin on Saudi Arabia’s domestic exchange, and the offering’s record-breaking size could be an unavoidable hurdle.
“An initial public offering in the Kingdom of this kind and size is unprecedented,” the company wrote. “Any disruption in trading of the Shares could impact their market price and delay the ability to conduct transactions.”
The domestic Tadawul stock exchange dropped 2.4% when Aramco officially kicked off its IPO. Investors had been anticipating the offering for weeks. But as the IPO date nears, investors are selling other Saudi stocks to shore up cash for Aramco shares. Any major moves in the index could bring market disruptions and unexpected trading activity.
Aramco’s prospectus also highlights the modernization of the Tadawul trading platform, and concerns around whether the system can handle the high volume trading expected to come with the IPO. The changes to the platform and its procedures “are untested and there can be no assurance that they will adequately facilitate” the listing, according to the company.
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