You might recall about a year ago when Saudi Arabia announced that it was going to take its government owned oil company, Saudi Aramco, public. In this initial announcement Saudi had intended to offer shares in this company across the international stock exchange. So that people and corporations and even governments could invest in the massive oil giant.
Saudi Aramco is by oil production standards, the largest oil company in the world. Keep in mind that almost every country around the world has some version of a government controlled oil company. Since all minerals in the world are controlled by governments except in the United States. Only here can a private individual actually own minerals. The belief was that Saudi Arabia recognizing Saudi Aramco’s total worth could raise capital to fund its government by selling off some ownership of the corporation. However, as oil prices declined the inherent value of the corporation also seemed to decline.
Over the past few months Saudi has continued its push to go public but seem to pause and evaluate whether the move was still logical. About a month ago Saudi announced that it might intend to put this move or this initial public offering on hold indefinitely. Well in the last week, we saw a new revelation come to market that the government of China was willing to purchase a 5 percent stake in Saudi Aramco off of the public market.
What this indicates is the difference between short term view and long term view. Why would Saudi Aramco be willing to sell 5 percent of its company to say the Chinese government and not want to go public? When you look at short term oil markets or short term oil prices this may drive you to assess a certain value on an oil producer like Saudi Aramco. Especially if on the near term horizon oil prices seem to hover in the $50 a barrel range.
However, if you believe that in two, three or four years that the total market for oil and natural gas is going to go up and that the pricing for oil and natural gas is going to go up. Then instead of going through the stock market you may want to invest in companies on the side. Hence the move that China is making and the agreement that Saudi Arabia is willing to sign. Recognizing the long term growth in oil demand and therefore an associated increase in oil prices and oil value.
Both the Chinese national government and Saudi Arabian national government recognize the value in Saudi Aramco. This is yet another indicator that the long term market for oil and gas is absolutely positive and reminds us why we are anticipating oil prices to go up in the United States over the next two years.
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Ryan Sitton is a native Texan who grew up in the Irving area. He is a graduate of Texas A&M University where he earned a degree in Mechanical Engineering. Ryan founded PinnacleAIS, an engineering and technology company focused on reliability and integrity programs for the oil, gas, and petrochemical industries. He was elected to the Railroad Commission in 2014 to a six-year term. You can read more about Ryan HERE.