Aramco aside, US rivals Saudi Arabia for oil domination

Maybe this time it is for real. Saudi Aramco formally announced Sunday that they could sell shares on its domestic exchange next week with more details expected over the next few days.

Continue Reading Below

The deal will up the ante between the United States, and Saudi Arabia, for global energy dominance. The initial public offering should help the Saudis better compete as they look to diversify their Middle East economy.

With U.S. producers struggling with low prices, the Saudis need a successful IPO to ward off competition from the new powerhouse producer, the United States which is nipping at their heels. The Saudis and Crown Prince Mohammed bin Salman have had a long-term goal of diversifying their nation away from only oil.

The reasons are varied and not only do they fear a potential drop-in long-term energy demand, but they also fear that the rise of the U.S. energy producer puts their long-term economic prospects at severe risk.

The Chinese, in efforts to ease the sting of cooling relations with the U.S., are also chomping to cozy up to the kingdom, FOX Business reported.

At the end of the day, the key to the success of the IPO will not only be the price of oil but also the ability of Saudi Arabia to gain the trust of the world marketplace.  While this is the world's most anticipated IPO, of what is the world’s most profitable company, it raises more questions than answers.

ARAMCO LEADS WORLD'S BIGGEST IPOS

Not only does the valuation reportedly appear to fall far short of the $2 trillion valuations that Crown Prince Mohammed bin Salman said he wanted, but it also raises the question of trust. Do investors want to put money into an entity that is still majority controlled by the Saudi government on the Riyadh exchange? The plan to go public with Saudi Aramco is an admission that the Saudis are worried about what comes after oil.

 GET FOX BUSINESS ON THE GO BY CLICKING HERE

There have been many that have wanted to get a piece of this IPO, yet while there could be a lot of potentials, there is still a lack of trust. The listing of the stock on the domestic exchange first is really a test run to see how the shares might play out in the real world. And the real world is where fiscal transparency is going to have to be the norm for a state-run entity that up until now, has had the power to call all of the shots.

The Saudis, of course, have a vested interest to make sure that the IPO not only goes off without a hitch but also wants to give incentives to IPO buyers to hang in for the long haul.

The Saudis not only have reduced their take on the oil that they sell, but they are also offering investors an extra share for every 10 that they buy to keep the stock for at least 180 days before selling. That may be needed because of the assassination of Jamal Khashoggi who at the time of his death was a journalist for The Washington Post and a Saudi dissident.

Some investors worry that until the stock is listed outside of Saudi Arabia, the safety of a stock that is still majority-owned by the Saudi government and whether it will be a safe place to put your money. The investor really has to rely on the Saudis who still have the final say on all major decisions.

TickerSecurityLastChangeChange %
XOMEXXON MOBIL CORPORATION70.34-0.43-0.61%
RDS.AROYAL DUTCH SHELL PLC60.18-0.07-0.12%
CVXCHEVRON CORP.120.81-0.12-0.10%

Yet interest remains strong because of the size of the Saudi oil company. It dwarfs other oil majors and is more than enough to fit the combined market capitalizations of Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp, the world’s three largest publicly-listed energy companies according to Bloomberg.

That size advantage has many people willing to assume some of the risks.

CLICK HERE TO READ MORE ON FOX BUSINESS

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.