LONDON/DUBAI: SaudiAramco's biggest asset could also be a liability. The state energy giant's vastoil reserves - it can sustain current production levels for the next 50 years -make it more exposed than any other company to a rising tide of environmentalactivism and shift away from fossil fuels.
In the threeyears since Saudi Crown Prince Mohammed Bin Salman first proposed a stockmarket listing, climate change and new green technologies are putting someinvestors, particularly in Europe and the United States, off the oil and gassector. Sustainable investments account for more than a quarter of all assetsunder management globally, by some estimates.
Aramco, for itspart, argues oil and gas will remain at the heart of the energy mix fordecades, saying renewables and nuclear cannot meet rising global demand, andthat its crude production has lower greenhouse gas emissions than its rivals.But with the company talking again to banks about an initial public offering(IPO), some investors and lawyers say the window to execute a sale at a juicyprice is shrinking and Aramco will need to explain to prospective shareholdershow it plans to profit in a lower-carbon world.
"SaudiAramco is a really interesting test as to whether the market is getting seriousabout pricing in energy transition risk," said Natasha Landell-Mills, incharge of integrating environment, social and governance (ESG) considerationsinto investing at London-based asset manager Sarasin & Partners. "Thelonger that (the IPO) gets delayed, the less willing the market will be toprice it favorably because gradually investors are going to need to askquestions about how valuable those reserves are in a world that is trying toget down to net zero emissions by 2050."
Aramco toldReuters it was ready for a listing and the timing would be decided by thegovernment. The company also said it was investing in research to make carsmore efficient, and working on new technologies to use hydrogen in cars,convert more crude to chemicals and capture CO2 which can be injected in itsreservoirs to improve extraction of oil.
Selling the story
Some would arguethis is not enough. A growing number of investors across the world arefactoring ESG risk into their decision-making, although the degree to whichthat would stop them investing in Aramco varies wildly. Some would exclude thecompany on principle because of its carbon output, while others would beprepared to buy if the price was cheap enough to outweigh the perceived ESGrisk - especially given oil companies often pay healthy dividends. At a $1.5trillion valuation, Aramco would be the world's largest public company. If itwere included in major equity indices it would automatically be bought bypassive investment funds that track them, regardless of their ESG credentials.And as the world's most profitable company, Aramco shares would be snapped up by many active investors.
Talks about ashare sale were revived this year after Aramco attracted huge investor demandfor its first international bond issue. In its bond prospectus, it said climatechange could potentially have a "material adverse effect" on itsbusiness. When it comes to an IPO, equity investors require more informationabout potential risks and how companies plan to deal with them, as they aremore exposed than bondholders if a business runs into trouble.
"Companiesneed to lead with the answers in the prospectus, rather than have two or threeparagraphs describing potential risks from environmental issues," saidNick O'Donnell, partner in the corporate department at law firm Baker McKenzie.
"An oil andgas company needs to be thinking about how to explain the story over the next20 years and bring it out into a separate section rather than hiding it away inthe prospectus, it needs to use it as a selling tool. And also, once the IPO isdone, every annual report should have a standalone ESG section."
Aramco's seniorvice president of finance Khalid Al-Dabbagh said during an earnings call thismonth that its carbon emissions from "upstream" exploration andproduction were the lowest among its peers. A study published by Sciencemagazine last year found carbon emissions from Saudi Arabia's crude productionwere the world's second lowest after Denmark, as a result of having a smallnumber of highly productive oilfields.
The oil price
Aramco says that,with the global economy forecast to double in size by 2050, oil and gas willremain essential. "Saudi Aramco is determined to not only meet the world'sgrowing demand for ample, reliable and affordable energy but to meet theworld's growing demand for much cleaner fuel," it told Reuters."Alternatives are still facing significant technological, economic and infrastructurehurdles, and the history of past energy transitions shows that thesedevelopments take time."
The company hasalso moved to diversify into gas and chemicals and is using renewable energy inits facilities. But Aramco still, ultimately, represents a bet on the price ofoil. It generated net income of $111 billion in 2018, over a third more thanthe combined total of the five "super-majors" ExxonMobil, Royal DutchShell, BP, Chevron and Total. In 2016, when the oil price hit 13-year lows,Aramco's net income was only $13 billion, according to its bond prospectuswhere it unveiled its finances for the first time, based on current exchangerates. Its earnings fell 12 percent in the first half of 2019, mainly on loweroil prices.
Concerns aboutfuture demand for fossil fuels have weighed on the sector. Since 2016, whenPrince Mohammed first flagged an IPO, the 12-months forward price to earningsratio of five of the world's top listed oil companies has fallen to 12 from 21on average, according to Reuters calculations, lagging the FTSE 100 and theSTOXX Europe 600 Oil & Gas index averages. By comparison, UK-listed fundsinvesting in renewable energy infrastructure such as wind farms are trading atone of the biggest average premiums to net asset value.
An influx ofcapital
Using a broadmeasure, there was global sustainable investment of $30.1 trillion across theworld's five major markets at the end of 2018, according to the GlobalSustainable Investment Review. "Given the influx of capital into the ESGspace, Aramco's IPO would have been better off going public 5-10 yearsago," said Joseph di Virgilio, global equities portfolio manager at NewYork-based Romulus Asset Management, which has $900 million in assets undermanagement.
"An IPOtoday would still be the largest of its kind, but many asset managers focusingsolely on ESG may not participate." The world's top listed oil and gascompanies have come under heavy pressure from investors and climate groups inrecent years to outline strategies to reduce their carbon footprint. Shell, BPand others have agreed, together with shareholders, on carbon reduction targetsfor some of operations and to increase spending on renewable energies.
US majorExxonMobil, the world's top publicly traded oil and gas company, has resistedadopting targets. Britain's biggest asset manager LGIM removed Exxon from its 5billion pounds ($6.3 billion) Future World funds for what it said was a failureto confront threats posed by climate change. LGIM did not respond to a requestfor comment on whether it would buy shares in Aramco's potential IPO. - Reuters