ANKARA 

It is both difficult and highly unlikely for Saudi Aramco to float its shares on international markets in the next two years due to transparency and security issues, according to a London-based independent oil market analyst.

Gaurav Sharma told Anadolu Agency the Tokyo exchange is likely to be the closest candidate for share offerings outside of the Saudi stock exchange, the Tadawul.

After offering 1.5% of its shares and gaining a record $25.59 billion in its initial public offering (IPO) with a $1.7 trillion market valuation last week, Aramco shares began trading on the Tadawul on Wednesday and gained 10% to push the company's market value up to around $1.87 trillion.

While this amount is still lower than the $2 trillion target set by Saudi Crown Prince Mohammed bin Salman in 2016, it is also highly unlikely that Aramco shares will float on major international markets as the crown prince wanted.

"For three years we are talking about this IPO. First, they wanted to do a listing in New York, London, Hong Kong, Tokyo plus the Saudi domestic exchange Tadawul. First, it was 10%, then it became 5%, and now it's just 1.5% with no international listing," Sharma said.

Since the crown prince announced the idea of an IPO for the first time in January 2016, Saudi Arabia changed two oil ministers. Ali al-Naimi was replaced by Khalid al-Falih in May 2016, who then was replaced in September 2019 by Prince Abdulaziz bin Salman -- half-brother to the Crown Prince Mohammed bin Salman.

Furthermore, OPEC heavyweight Saudi Arabia began establishing close relations with non-OPEC oil-producing countries to support oil prices and formed the group known as OPEC+.

"At the time we started talking about the IPO, suddenly Saudi Arabia changes oil minister and starts coordinating with Russia, Mexico, Kazakhstan, trying to bring non-OPEC together. They were trying to get the maximum value for the IPO to keep the oil prices as high as possible between $65-$75 per barrel," Sharma said.

"But in the market dynamics, given that there is so much shale oil from the U.S., and also oil from Brazil, Canada, Norway, Guyana, that just didn't work. OPEC took the barrels out, but the crown prince's main objective of making the price as high as possible actually failed," he added.

OPEC+ has lowered its oil production three times since December 2016 but oil prices are still stuck at the $60 per barrel range.

Yet, Saudis have found other solutions to highlight the magnitude of the IPO, such as the high net income of Aramco that surpasses all of other oil majors' earnings combined, and valuable dividends to shareholders.

Aramco's net income of $111.1 billion in 2018 and $46.9 billion in the first half of 2019 were both higher than the collective earnings of nine oil majors ExxonMobil, Chevron, ConocoPhillips, BP, Royal Dutch Shell, Total, Eni, Equinor, Rosneft, according to data compiled by Anadolu Agency in November.

"Aramco will give $75 billion in dividends. That is a fantastic dividend. That beats Apple, and everybody else. The selling point is there," Sharma said.

However, he warned that the fundamentals are still risky because he argued that at the end of the day, Aramco's main product is oil, and once it makes its public debut, he said it will be treated like all the public oil companies who face oil prices stuck at $60 a barrel.

“For 2020 and 2021, there's not much happening for oil to go to $70 or $80 per barrel," he said.

Sharma considers that fluctuating oil prices constitute a risk issue for Aramco, like all oil companies, because Aramco’s share prices are tied to a volatile oil market, which will inevitability affect its stock price.

Transparency and security risks

Aramco clarified in its IPO prospectus released on Nov. 10 the risks associated with the hydrocarbon industry with the climate change issue that is fossil-fuel averse, as well as political and social instability, and actual or potential armed conflicts in the Middle East.

Drone attacks on two Aramco facilities on Sept. 14 caused a production cut of 5.7 million barrels per day (bpd), equal to around 6% of global oil output, and raised concerns about the security of the company's infrastructure after the kingdom spent $68 billion on defense in 2018, ranking third in terms of expenditure after the U.S. and China.

"The whole region is very volatile. If there's another attack on Saudi facilities, it will impact the share price. The risk profile is very high," Sharma said.

"The product is volatile, geopolitics is volatile, and Aramco admits that the energy mix is transitioning," he added.

Other challenges that investors face and could pose issues for international listing are the lack of say on how the company is run, the inability to liquidate investor assets for 12 months, and Aramco board's closeness to the Saudi royal family.

"These kinds of parameters will not work with London and New York because investors will ask for scrutiny," Sharma said.

While uncertainties over Brexit also make the London stock exchange less likely for an Aramco listing, U.S. legislation passed in 2016 that allows victims of September 11 attacks to sue Saudi Arabia makes a New York listing less attractive for Riyadh.

"Listing on international markets invites a lot of scrutiny. It requires a level of openness that Saudis are not comfortable with," Sharma said.

Tokyo only possible option

With London and New York potentially ruled out, that leaves listings only on the stock exchanges of Hong Kong and Tokyo.

Sharma affirmed that if Aramco goes to Hong Kong, it would not get the valuation and capitalization that it wants to raise because Hong Kong is not considered to be of the same caliber.

"Tokyo exchange is a possible avenue. In Tokyo, you can get a higher capitalization [for Aramco], and it is one of the leading financial centers in the world," he said.

Japan offers international operators, available funds, institutional investors and the country carries heavy clout for a lot of banks, he argued.

However, the expert said with an estimated 2.3 million barrels per day of additional crude oil coming into the market in 2020, oil prices would still come under pressure, and that could make Aramco's international listing highly unlikely.

"I would be very surprised if there is an international floating in the next two years," Sharma concluded.