(Bloomberg) -- As Saudi Aramco presses on with plans to pitch its initial public offering to analysts, strikes on key oil facilities has heightened investor fears about the prospect of more attacks in the future.
“They are the best assets in the world but I have no interest in owning Aramco given the security risks,” said Ben Cleary, Asia chief executive officer at Tribeca Investment Partners Pty. “The issues in the Gulf don’t seem like they are going anytime soon.”
In an attack blamed by the U.S. on Iran, a swarm of drones laden with explosives set the world’s biggest crude-processing plant ablaze, cutting the kingdom’s oil production in half. Iran denied responsibility, which was instead claimed by Iranian-backed Houthi rebels in Yemen. Houthis on Monday threatened more attacks on oil installations in Saudi Arabia.
The sprawling state-owned company controls one-fifth of the globe’s petroleum reserves and pumps more crude than the top four publicly-traded oil companies combined. Aramco officials are growing less optimistic about a rapid recovery in oil production, a person with knowledge of the matter said.
Crown Prince Mohammed bin Salman, the architect of the IPO, said he expects Aramco to be valued at over $2 trillion. Analysts, however, see $1.5 trillion as more realistic, while supply disruption stemming from the strikes over the weekend could further widen the gap in valuation. Floating a minority stake of the oil giant, officially known as Saudi Arabian Oil Co., is part of Prince Mohammed’s efforts to modernize and diversify the country’s economy.
The attack comes as listings from the energy sector are at a 16-year low globally. A weakening outlook for global oil demand, a flood of new supply from shale fields in the U.S. and growth in cleaner energy sources have been weighing on crude markets. Volatile commodity prices aside, a number of large global asset managers are shunning fossil fuel assets, impacting demand for energy stock offerings.
Oil prices surged by the most on record to more than $71 a barrel after the strikes removed about 5% of global supplies. The jump reverberated across asset classes, with gold rising about 1%. S&P 500 futures fell as much as 0.8% but had pared the loss to 0.4% as of 10:30 a.m. London time, while Europe’s Stoxx 600 Index was down 0.5%.
Meanwhile, Saudi equities surprised market watchers by rising as much as 1.1%, spurring speculation that government funds may be supporting the assets. Stocks on Sunday tumbled 3.1% within the first minute of trading before ending the day with a 1.1% loss.
Here’s more from analysts and investors:
Tribeca Investment, Ben Cleary
- “Very hard to see an IPO until security of production facilities has been improved”
AXA Investment Managers, Gilles Guibout
- “Short term, need to understand how long it could take to come back to normal production level”
Al Dhabi Capital, Mohammed Ali Yasin
- “I think this attack may delay the IPO even on the local exchange, and could affect the valuation negatively, as the investors have seen a live demonstration of the risk levels of the future revenues and business of the company. That was very low prior to this weekend attack”
- “Aramco has one main source of revenue, oil. That is its strength, but now it is becoming its biggest weakness if it gets disrupted”
United Securities, Joice Mathew
- This “will force investors to go back to the drawing board and re-evaluate their risk models on Aramco”
- “Even though this is a rare event, which could be potentially categorized as 4 or 6 sigma levels, the geopolitical risk premium on Aramco’s valuation model would show a sharp increase”
- “As far as the pricing is concerned, my view is that there may not be much of an impact if the government is contemplating a 1% listing on the Tadawul. I think the government has the power and ability to influence the decisions of anchor investors there”
Tellimer, Hasnain Malik
- “Ultimately the security risk is not so acute that it outweighs oil price, oil output and free float drivers of the valuation”
- This attack “also provides an opportunity for Aramco to demonstrate the redundancy and resilience of its supply chain by minimizing disruption to customers and thereby helping to mitigate the valuation impact of this risk”
Qamar Energy, Robin Mills
- “It will be all but impossible to proceed with the IPO if there are ongoing attacks”
- “Valuing Aramco like Shell or ExxonMobil gets us to about $1.2 trillion-$1.4 trillion. But that would drop significantly if we apply company-specific risk factors”
Al Ramz Capital, Marwan Shurrab
- “The attacks could impact foreign sentiment for the IPO, but I don’t see a substantial hit to the valuation at this stage”
- “Geopolitical risk has always been an important factor for valuations across the Middle East region. Aramco will have to demonstrate its financial resilience toward such incidences to gain investors confidence”
Eurasia, analysts led by Ayham Kamel
- “Crown Prince Mohammed bin Salman will push the company to demonstrate that it can effectively tackle terrorism or war challenges,” Eurasia Group said in a report
- “The attacks could complicate Aramco’s IPO plans”
- “The latest attack on Aramco facilities will have only a limited impact on interest in Aramco shares as the first stage of the IPO will be local. The international component of the sale would be more sensitive to geopolitical risks”
- Current valuation estimates for Aramco and its assets might not fully account for geopolitical risks
--With assistance from Mahmoud Habboush and Shaji Mathew.
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