Crude Oil and the Aramco IPO

Crude Oil and the Aramco IPO
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Crude oil recently reached a high of $66.66 per barrel on the active month NYMEX futures contract on January 25. The energy commodity had an impressive run on the upside considering it traded to a low of $42.05 on June 21, 2017. The rally of over 58.5 percent came to an end at the ominous price and fell to a low of just over $58 per barrel on a corrective move. At the same time, the stock market was making new highs on almost a daily basis since February 2016. The bull market in equities recently stumbled as a decline in the bond market because of inflationary fears caused interest rates to rise. 

Source: Barchart


The XLE, a measure of energy stocks declined from highs of $78.39 on January 24 to a recent low of $64.45 on February 9.

Saudi Arabia is one of the world’s leading producers of crude oil. The crown jewel of the Saudi Royal Family and the nation is their state oil company, Aramco. The King of Saudi Arabia and his son, the Crown Prince, expressed their intention to diversify the Saudi economy away from dependence on revenues from the energy commodity in their Vision 2030. The Kingdom’s sovereign wealth fund plans to invest in businesses around the world to achieve their goals. Perhaps the primary goal, when it comes to capitalizing the fund, is an initial public offering of Aramco which would become the world’s largest publicly-traded oil company. Estimates for the valuation of Aramco range from $400 billion on the low-side to over $2 trillion. It is possible that the IPO will be the biggest in history.

When crude oil was rallying, and stocks were on their highs, the Saudis were feeling good about the prospects for their offering of shares in Aramco. The Crown Prince, when he optimistically projected that the valuation could be as high as $2 trillion, said that plans were to sell 5% of the shares to the public which would yield a cool $100 billion inflow into the sovereign wealth fund. If the valuation turns out to be lower, the Saudis could sell a more significant percentage to capitalize the fund. As long as they maintain a majority stake, the Royal Family will continue to control the company. However, over recent weeks, King Salman and his son got hit with a double-whammy as stocks faltered and crude oil corrected to the downside.

The IPO is likely to come to market in late 2018 or early 2019, and the valuation will depend on the price of the energy commodity and the level of the equities market. There is lots of vested interest when it comes to this offering from the Saudis. The bankers and exchanges will earn huge fees, and the investing public could be hungry for the excitement of what is likely to be the biggest IPO in history. Right now, I am sure that somewhere in Riyadh, the capital of the Kingdom, the King, and Crown Prince are hoping that the correction in stocks and the price of oil are temporary events and only a speed bump on the way to new highs in oil and the equities market. 

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