Aramco IPO: Risk Is Part of the Equation

This week’s drama in oil markets serves as a reminder that business is all about taking calculated risks—particularly the energy business. What is true for Saudi Arabian Oil Co., or Aramco, also holds true for a supermajor such as Exxon Mobil. The relative assessment of those companies’ riskiness shifted after the former was the target of the weekend’s attacks knocking more than half of its production offline.

Saudi officials may delay Aramco’s planned initial public offering as a result, but the risk of another incident shouldn’t derail it. Investors’ skittishness will be reflected in the company’s valuation once Aramco’s shares trade. There already was peril in having a powerful controlling state shareholder selling part of a company that it effectively nationalized decades ago. Security risks, which already should have been part of any investor’s assessment, will loom even larger now.

That doesn’t mean Aramco’s vast oil reserves aren’t valuable enough for a listing or even that the company would fall short of becoming the world’s most valuable publicly traded energy company. It probably would be the most valuable public company, period, though likely short of the lofty $2 trillion aspirations of Saudi Arabia’s de facto ruler Crown Prince

Mohammed bin Salman.

Many large oil companies operate in far riskier regions. Exxon has a big liquefied natural gas operation in Papua New Guinea and oil production in Iraq, for example. But many of the 41 countries where it has upstream operations are safe and politically stable, and even the less stable ones don’t become problematic simultaneously. Investors also have appetites for companies with more concentrated exposure.

Tullow Oil

operates primarily in fields in East and West Africa.

Kosmos Energy

has built a business around going to some of the more difficult regions to explore for oil and develop assets, including Equatorial Guinea and Mauritania.

Medco Energi

has operations in Tanzania, Yemen, Oman and Indonesia. Such stocks aren’t for the faint of heart, but Aramco will sell at the right valuation. It is unique because it is both concentrated and simply too big for an energy investor to ignore. Saudi authorities might not be pleased with the price they receive even if they wait until Saturday’s attack fades into memory. Like prospective investors, they also may have to grin and bear it.

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