Saudi Arabian Oil Co. has captured the oil industry’s attention with plans for an initial public offering that could raise more than $100 billion, but some investors are wary, pointing to the track records of other government-controlled energy companies.
The plan to float as much as 5% of Aramco, the world’s largest oil company, has kicked off a scramble among banks for a role in a deal that could generate $1 billion in fees—the biggest investment-banking deal ever. The kingdom estimates the company has a value of between $2 trillion and $3 trillion.
But several publicly listed, state-run oil firms have stumbled, demonstrating the hazards in investing in government-controlled companies.
Of that group, which includes Brazil’s Petroleo Brasileiro SA, Russia’s OAO Rosneft and most recently Kazakhstan’s KMG EP, only Norway’s Statoil ASA has avoided a steep share-price drop. Many have been roiled by governments that put political concerns ahead of investor returns.
That highlights the dilemma that would-be Aramco investors could face: Would Aramco be accountable to shareholders or to the kingdom that still would own a stake of at least 95%?
“Investing into a government-run entity, which acts as kind of a government agency with huge influence and priorities other than value creation, it raises tension,” said Pascal Menges, who manages a resources fund at Switzerland-based Lombard Odier Investment Management. The fund used to have small stakes in state-controlled oil companies but currently has none.
The Aramco IPO, which could happen as soon as 2018, is part of a plan to raise funds to diversify the Saudi economy after a two-year slump in oil prices. Saudi officials said New York, London and Hong Kong are potential locations for a listing.
The Saudi oil ministry declined to comment. Saudi Oil Minister Khalid al-Falih said in June that Aramco has “best-in-class governance standards.”
“Part of the IPO will be to disclose, and I think the company will do that and everybody will see firsthand how great a company it is, and that will contribute to its valuation,” he said.
In recent years, New York-listed shares in Brazil’s state-run oil firm have withered under a continuing corruption probe following its 2010 offering. The government’s desire to build up local companies that could supply the oil industry and other sectors raised costs and delayed some oil developments while infrastructure such as shipyards was constructed.
In Russia, Rosneft offered shares on the London Stock Exchange in 2006, raising $10.7 billion from investors eager to take advantage of the company’s growth prospects. But in 2014, Rosneft’s ability to take on long-term debt to spend on new oil fields was crimped after Russia annexed Crimea and the U.S. sanctioned the company’s leader for ties to President Vladimir Putin.
In China, the share prices of the listed units of China’s big three state-controlled oil companies have fared better, but profits at producers such as PetroChina Co. continue to be dragged down by a huge cost base. That includes hundreds of thousands of employees on its books and aging, high-cost domestic oil fields.
The world’s biggest independent energy companies such as Exxon Mobil Corp. and Royal Dutch Shell PLC are also prone to ups and downs, tending to trade up and down with the price of crude oil. Some companies have had catastrophic events that have wiped out billions in shareholder value, such as the blowout in the Gulf of Mexico, in which BP PLC has so far incurred legal and cleanup costs of $61.6 billion.
But their stocks generally have been steadier performers than state-run oil companies.
Since October 2010, Chevron Corp. and Exxon shares have risen about 30% and 52% respectively, while London listed shares of Rosneft and KMG EP have lost 22% and 55%. New York-listed shares of Petrobras have lost 78% over the same period.
Government-run oil companies have the potential to be profit machines. They control about 75% of the world’s proven reserves and more than half of daily oil output. In addition, many have onshore deposits that are cheaper to tap than budget-busting deepwater, oil-sand and shale reserves that Western energy giants rely on.
But split priorities make some state-run companies less profitable. “The government’s objectives may not always be fully aligned with the shareholders,” said Wood Mackenzie oil-company analyst Stewart Williams.
Investors say they see a fresh reason to worry about IPOs involving state-run assets in Kazakhstan.
The government-controlled gas company, NC KazMunaiGas, spun off publicly listed KMG EP 10 years ago for about $2.3 billion, retaining about 58% of the new firm. Since the 2006 London IPO, KMG EP shares have halved.
Now KazMunaiGas is trying to take control of KMG EP’s oil and gas resources and get better access to the public company’s $3 billion in cash. KazMunaiGas is gearing up for its own IPO sometime from 2018.
The oil-price decline, which has hit the state-controlled parent company’s finances hard, has partly prompted the latest moves.
Matthias Westman, founding partner of Russia-focused hedge fund Prosperity Capital Management and a KMG EP investor, said it also showed how government goals can clash with shareholders focused on profits.
“When times get tough, then some people resort to worse behavior,” he said.
KazMunaiGas said it is seeking control to tackle KMG EP’s “bureaucracy and duplication in decision making, optimizing cost and maximizing cooperation.”