The battle over whether Saudi Arabian oil giant Aramco will decide to list in London or New York has kicked off once again, with both sides trying to woo the major for what is likely to be the biggest stock market float of modern times.
However, while the City’s banks and law firms may be drooling at the prospect of raking in possibly £1bn-worth of fees from an Aramco listing, the oil giant’s presence on the exchange could throw up more problems than expected.
One issue is the potential impact of the weighting on the FTSE 100 and the impact of the blue-chip oilers.
As of close on 28 June, London’s two oil majors BP PLC (LON:BP.) and Royal Dutch Shell PLC (LON:RDSB, RDSA) collectively account for around 17% of the FTSE 100’s total weighting, meaning movements in their shares can exert a large amount of influence over whether the index goes up or down.
Shell, the largest company on the LSE, has a market cap of £186bn. By contrast, Aramco has been previously been valued at US$1.2 trillion (£980bn) by Bloomberg, over five times the size of Shell.
Even if the Saudi oiler listed a quarter of its shares this would still be enough to give it a listed market cap of around £250bn, making it the largest FTSE 100 constituent by far.
Such a large oil company weighing on the index would leave the FTSE 100 much more exposed to fluctuations in global oil prices, which can already affect the shares of blue-chip heavyweights such as BP and Shell, as well as forcing investors to pay greater attention to Saudi politics and the stability of the Middle East region.
This is because Aramco is not only a massive oil producer but also because its operations are almost entirely focused within Saudi Arabia, rather than spread across the globe like other majors.
There is also the added concern that a move away from fossil fuels could leave the company more vulnerable as time goes on, with other oil & gas firms already looking at ways to move into renewables to address the decline in so-called ‘dirty’ fuels such as coal and oil.
There have also been issues raised around aspects of Aramco’s governance structure, with the company having a less than stellar record on transparency.
Back in 2017, the UK’s Institute of Directors (IoD), an organisation that represents business leaders, criticised moves by the Financial Conduct Authority (FCA) to create a new ‘premium’ listing category that would have allowed Aramco and other sovereign-controlled firms to list on the LSE without having to abide by certain shareholder protections such as the need for investor approval for large asset sales or purchases.
In a letter on 21 July of the same year, the IoD said the proposed changes could lead to “undue hands-on and politically-motivated” interference in sovereign-owned companies and cause a “detrimental impact” on the UK’s reputation for sound corporate governance.
Russ Mould, investment director at AJ Bell, said that while the FCA’s proposed rule changes did not mention Aramco directly, the timing was “intriguingly coincidental” and that the regulators move to rewrite its own rules in a bid to attract the Saudi firm to London was “pretty craven”.
He also questioned why sovereign firms would get an exemption from the rules that apply to all other UK and non-UK domiciled firms, or why the rules would not be changed for all cases if exemptions could be created for Aramco.
Mould said, “surely it cannot be right that a firm will not have to get approval from outside shareholders for transactions with the state that owns a major or controlling stake? And surely it cannot be right that shareholders will not be allowed to vote on the identity of independent directors?”
Issues for index trackers
The dominance of Armaco in the FTSE 100 and its opaque governance structure would be a particularly acute issue for index-tracker funds, which are obliged to invest in all companies in the indices they follow.
However, there may be some relief for the index investors in the fact that Aramco has said previously that it may not seek inclusion in the index but rather just a premium listing for its shares.
Mould said this would at least assuage the concerns of savers who may “wittingly or unwittingly” find themselves invested in Aramco indirectly through their funds.