Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

The bankers preparing the IPO of the century, that of Saudi Aramco, should take a look at this chart:

Trouble Back Home
Shares of Petrobras trading in Frankfurt fell as much as 19 percent on news of a fresh political crisis in Brazil
Source: Bloomberg
Note: Intra-day pricing.

News of another political crisis in Brazil sparked a sell-off in the country's stocks and bonds. Shares of Petroleo Brasileiro SA, or Petrobras, trading in Frankfurt fell on Thursday morning by the most since 2008 -- not a vintage year, you'll recall.

This latest eruption, with allegations of a scandal involving President Michel Temer, comes less than a year after his predecessor, Dilma Rousseff, was impeached over another scandal. That one actually involved Petrobras and bribes paid to some officials of Brazil's national oil champion. The allegations made against Temer appear to be linked to the investigation that took down Rousseff, known as Operation Carwash, but there's no indication at this point that Petrobras is directly involved. Futures for U.S.-traded shares of Vale SA, the giant Brazilian miner, also fell sharply on Thursday morning, down 11 percent as of this writing.

So why are Brazil's political shocks of concern for Saudi Arabian Oil Co.?

Aramco's IPO is the centerpiece of Saudi Arabia's ambitious reform program, Vision 2030, spearheaded by Deputy Crown Prince Mohammed bin Salman. The kingdom has spoken of Aramco being valued at potentially $2 trillion, which would make it the world's biggest listed company by far. Getting a high valuation matters on multiple fronts, as even floating a sliver of the company would raise much-needed cash while simultaneously seeding the giant sovereign wealth fund the government hopes to use to wean the economy off its dependence on oil. Bolstering national pride at a time of potentially far-reaching domestic reform, as well as fighting several wars, doesn't hurt either.

One of the big factors weighing against such giddy valuations, though, is the very fact that Aramco lies at the center of Saudi Arabia's economy and politics. Whenever the day comes that an investor buys a share in Aramco, they won't just be buying a tiny part of an oil major, they'll be buying a tiny part of the project to overhaul Saudi Arabia.

This is where the experience of Petrobras comes in. While Brazil isn't as dependent on oil revenue as Saudi Arabia, its government put Petrobras at the center of efforts to develop the vast reserves discovered off the country's coast about a decade ago, as well as associated industries. Those discoveries, along with the commodity supercycle and general hype around Brazil at the time, propelled Petrobras's valuation to supermajor levels:

Supercharged
Petrobras's market cap once rivaled that of Exxon Mobil
Source: Bloomberg

The rise sowed the seeds of the fall that followed, as Petrobras's costs and debts spiraled and then corruption surfaced. The oil crash delivered the coup de grace.

This isn't to say Aramco is bound to follow that tragic arc. But the company, its state owner, and its bankers will have to work very hard to put clear daylight between Aramco's commercial identity and its national provenance. Its sheer scale means it will be the go-to stock to buy when sentiment on Saudi Arabia is strong -- but also the one to dump when optimism falters or crisis threatens. Even at the low-end valuation Wood Mackenzie reportedly put on Aramco, a mere $400 billion, it would be worth more than double the entire market cap of Saudi Arabia's Tadawul All Share Index.

This isn't a phenomenon that only affects oil majors in emerging markets. From late 2010 through 2012, as the Greek debt crisis was exploding, shares of Total SA and Eni SpA -- the French and Italian national oil champions, respectively -- clearly started taking their cues from the convulsions in the euro zone rather than rising oil prices:

Greek Fire
Even as their U.S. and U.K. peers were enjoying the recovery in oil prices, Total and Eni were dragged lower as Greece sent shockwaves through the euro zone
Source: Bloomberg
Note: Performance indexed to 100.

As much as a listed Aramco will bestride the global oil market, home ties will exert a powerful influence for years to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net