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Saudi Arabia is again discussing the sale of a small part of its national oil company, Aramco, to the public. The announcement attracted little attention from those who follow the actions of oil companies. From this lack of discussion, I conclude that most analysts believe that an IPO on Aramco will be a non-event.
Those who believe that should think again. The sale of shares could reduce oil stocks by up to 10% if Saudi Arabia raised $ 100 billion. Listed oil companies could be forced to quickly curtail their exploration and production programs to buy back shares to offset the effect of selling and to support stock prices. Non-OPEC production could begin to decline, leading to an increase in Saudi production, an increase in Saudi revenues, and possibly higher oil prices.
The sale of Aramco shares could be a major event – and a major disaster for Big Oil, as well as for those who hold shares in oil companies. Here's why.
The oil sector is now a betting industry for many investors. His unpopularity did not match that of the tobacco industry twenty years ago. Non-governmental organizations like Climate Tracker have pushed big investors to divest shares of oil, gas and coal companies. Large pension funds, sovereign wealth funds and college endowments have responded to this pressure by selling shares in many companies. Divestments contributed to the underperformance of energy equities relative to major indices. For example, the S & P Energy index is unchanged in 2019, while the S & P 500 index is up 17%.
The rejection of energy stocks has reduced the market capitalization of the largest publicly held oil companies. These companies (BP, Chevron, ENI, Equinor, ExxonMobil, Shell, Petrobras and Total) have a total market capitalization of $ 1.3 trillion. (Microsoft is worth almost as much as that alone.) The total climbs to $ 1.6 trillion, if we add the other oil producers that are part of the S & P Energy index. It is a relatively modest sum. Related: Six bright clean energy ideas that never made it
The unpopularity of the sector with investors means that these companies must compete with Aramco for the investment dollars of a limited number of participants. There seems to be no elasticity today in investors offering money for oil industry shares. This means that Aramco's IPO, if continued, would result in a decline in the overall market capitalization of other companies as their shares are sold to fund the purchase of Aramco shares. (Although the lack of any elasticity in the supply of new funds may seem extreme, the data suggests that the money has come from the non-renewable asset sector for more than a year. is difficult to see why fund managers would reallocate their resources to non-renewable Aramco Shares.)
If investors sell shares of other "non-renewable" companies such as ExxonMobil, it is to be expected that the managers of these companies will take steps to offset the price decline. Today, they only have two options: buy back shares or increase dividends.
The choice of one or the other of these options would force the oil companies to no longer invest money in new or existing exploration or production projects. To see the impact, let's assume that Aramco's IPO raises $ 75 billion, all from the sale of shares of the eight largest oil companies. These sales would result in an average decline of 6% in the share price of these companies. The $ 75 billion reduction would also be equivalent to 60% of announced capital expenditures.
There should be little doubt that some, and perhaps all, of these companies would increase share redemptions if the IPO were to take place. Again, this would require them to divert capital from exploration and production or to issue more debt. In many cases, they would significantly reduce capital expenditures. Related: Is Renewable Hydrogen a Threat to Natural Gas?
This reduction would reduce their future oil and gas production. Indeed, the IPO of Aramco would slow down or reverse oil production increases in non-OPEC countries, particularly those in the United States.
The impact could be particularly severe for Shell and BP if Aramco shares were listed on the London Stock Exchange. Both companies should react quickly if investors seek to maintain balanced portfolios.
Those investing in oil stocks must focus on the threat of Aramco's stock market listing on the stock prices of other oil companies. Some see in the oil industry a collegial group of companies, all engaged in profits by selling more oil. Aramco IMO will test this proposal. There is a better model for the future of the industry in Silicon Valley, California, where the philosophy of "winner wins everything" dominates.
By Philip Verleger for Oilprice.com
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