Oil giant Saudi Aramco is readying what's set to be the biggest initial public offering ever. But as it turns out, investors might not be all that interested.
In fact, fund managers told CNBC that the Saudi energy behemoth — the valuation of which has seen estimates from $1 trillion to $2 trillion — comes up short for all three basic tests investors apply to potential IPO investments: growth, an attractive dividend and solid corporate governance.
Saudi Arabia, which plans to float 5 percent of the state-owned oil giant, may earmark the lions' share of the issue to strategic investors, reportedly from China, if the response from the broader market seems lukewarm.
The initial signals don't look positive.
Even portfolio managers with a reasonably bullish view on the price of oil are thinking twice about buying into Aramco because of uncertainty about the true extent of the company's — and effectively the Kingdom's — oil reserves.
"That's going to be the biggest hurdle. What are we buying?" said Kunal Ghosh, portfolio manager of global emerging markets at Allianz Global Investors who manages $2.1 billion. "For the last 100 years there's never been a published number that's validated. My enthusiasm for the IPO is very low."
Though Ghosh said he believed a higher price environment for oil may support the valuation during the initial stages when Aramco does come to market, the perceived lack of transparency over reserves and what's seen as weak corporate governance stemming from decades of state control represent longer-term structural hurdles for many investors.
"When I'm buying an oil company, I'm doing it because I have a view on the commodity, a view on reserves and a view on the management and their respect for my view as a minority shareholder," Ghosh told CNBC on Thursday.
"Saudi Aramco has been a private company for decades, and needs a change of mindset," Ghosh added. "Until there's a change of mindset, it will keep us on the sidelines. What multiples it will get for its reserves and earnings will be determined by their corporate governance."
To be sure, Aramco is in the process of attempting to answer the markets' questions.
The company has appointed international auditors to independently assess its massive oil reserves, a process that's expected to be completed by the end of the year. The result of that audit — and whether it undershoots or overshoots the official Saudi figure of over 261 billion barrels — will have a direct impact on the all-important valuation.
"In Saudi, they have done some verification in some small areas, but the full verification will take several years and will take time," said Fereidun Fesharaki, founder of energy consultancy, FACTS Global Energy. "However, based on the crude production capability, I think they may have more reserves than they said."
How Aramco handles the transition from national oil company to one answerable to shareholders, though in a minority, will be closely watched by the market.
Offering only 5 percent of the company "means investors are a very small minority and minority rights might be subordinated to national interests," said Bryan Goh, chief investment officer at private bank Bordier & Cie in Singapore. "Aramco is not just an oil and gas company, it's the sovereign wealth fund and economic and social development fund of Saudi Arabia. We can't be confident that the company will be managed from a purely commercial perspective."
Beyond questions of corporate priorities, many fund managers are also concerned that Aramco's business model simply won't stand up over the longer term as the rise of renewable energy undermines the future growth prospects for traditional oil and gas producers.
"It's a bit like asking if you would buy Ford if it was to IPO tomorrow. Unlikely. Its day in the sun has passed," said Warren Gilman, chairman and CEO of CEF Holdings.
Thomas Hugger, founder and CEO of fund manager Asia Frontier Capital, added: "We are not really bullish on the oil price due to the strong push by China to reduce the air pollution. However, each investment has its price and if the valuation is very attractive (which I doubt) it could be worth an investment."
One route that may enable Saudi Aramco to pull in buyers for its shares could be inclusion into the MSCI Emerging Markets Index, but would investors buy Aramco on a stand-alone basis?
"Maybe not," said Michael Preiss, a Singapore-based portfolio strategist at Taurus Family Office with $1.9 billion of assets under advisory. "It may be part of the (MSCI EM) Index, so you'll be forced to buy it."
And in a world that's shifting away from fossil fuels, Aramco is "a bit backward looking," Preiss said. "It's more of a sunset industry. The Saudis are realizing it's the end of the cycle."
Still, Aramco has its supporters.
"We need to see how they manage the governance but there's no doubt that everybody around the world is going to be interested in looking at Aramco," said Robert Thummel, managing director and portfolio manager at Tortoise Capital Advisors, which handles $16 billion in energy-related assets.
He pointed to its "massive reserves and the low-cost nature of production."