Race For Slice Of Saudi Aramco Heats Up: Exxon, BP May Join
Zacks Investment Research | May 10, 2016 10:17PM ET
The race to acquire a slice of Saudi Arabian Oil Co. or Saudi Aramco just got wilder as per media reports. This is because the potential entries now include energy bigwigs Exxon Mobil Corporation (NYSE:XOM) , China Petroleum & Chemical Corp. (NYSE:SNP) and BP plc (NYSE:BP) .
The sale of Saudi Aramco is expected in either 2017 or 2018 and is touted as being fivefold bigger than any Initial Public Offering (IPO) in history. Deputy Crown Prince Muhammad Bin Salman, second deputy premier and minister of defense, first announced in April the decision to sell less than 5% of Aramco in an IPO, valuing the company between $2 trillion and $2.5 trillion. This leaves Aramco with the potential to becoming the world’s most valuable company, surpassing Apple Inc. (NASDAQ:AAPL) which currently boasts a market capitalization of approximately $511 billion. This valuation makes Aramco’s IPO a dream for every investor on Wall Street.
Oil prospects still seem weak if we consider the U.S. Energy Department's latest inventory release which showed a rise of 2.8 million barrels in crude supplies to reach an all-time high of 543.4 million barrels. In order to overcome the cheap oil price impact, Saudi Arabia has already taken some measures like reducing spending and issuing domestic bonds. Its foreign-exchange reserves dropped 16% last year. Toward the end of last year, the government raised the domestic price of fuel, water and electricity. West Texas Intermediate (WTI) crude futures dived 2.7% this week and are now trading at around $44 per barrel.
However, oil prices have recovered dramatically from February lows, with a combination of U.S. dollar weakness and falling U.S. supplies, particularly from higher cost shale basins, helping the commodity’s fundamental equation. This organic development has been taking place even though OPEC, the Saudi-led global oil cartel, has been made ineffective due to its regional rivalry with Iran.
On the domestic front, these factors were to some extent offset by the huge wildfire in Canada and the subsequent production disruption. Additional support came from the Baker Hughes Inc. (NYSE:BHI) report that showed another drop in oil-directed rigs to a fresh six-year low, indicating a break in shale drilling activities.
The Saudi Aramco IPO follows a trend of privatization of state-owned companies amid falling oil prices. One of the major reasons for the company to consider divesting its shares might be to procure funds to combat a prolonged period of low oil prices. Also, the company may want to capitalize on the commodities which might lose value if demand for fossils fuels decreases to limit global warming.
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