The world's largest IPO, if and when it happens, will attract lots of attention. It is already being keenly watched by investors all over the world. I have said before that investors looking to put some cash in Saudi Aramco (which is due to list some time in the second half of this year) should look carefully at the company's valuation.
Crown Prince Mohammed bin Salman, Saudi Arabia's de facto ruler, has estimated the value of Aramco at $2.0 trillion, which would mean the listing of a 5% stake would bring as much as $100 billion to the state coffers. But there is no independent confirmation of this valuation, and few financial details about the company are available.
Something that is hard to value but could make this company a compelling investment is its research and innovation effort. As Saudi Arabia seeks to reduce its dependence on oil, ironically so does Aramco -- the company has a series of initiatives meant to make the use of oil more efficient.
This is attractive for investors. While nothing is impossible, it is not very likely than a better engine than the internal combustion engine will be developed in the coming decades. Any efforts to improve the efficiency of existing engines and to make a barrel of oil go further will be crucial to energy sector companies' bottom line.
Aramco has 11 research centers and technology offices, of which three in Saudi Arabia and the rest spread around the globe.
In an interview with Bloomberg published recently, Aramco's vice-president of technology oversight and coordination Ahmed Al-Khowaiter said the company is investing in developing new ways to make the internal combustion engine more efficient.
The threat of electric car engines is growing -- witness the ascent of Tesla (TSLA) -- and renewable energy sources are gaining ground. Plus, the use of fossil fuels is being increasingly taxed in various forms, directly or indirectly, all over the world.
So far, innovation in the energy field has focused a lot on developing hybrid engines and using more and more renewable fuels like biofuels or electricity.
But, al-Khowaiter pointed out, 99% of the engines in the world are still internal combustion ones. New technologies, like compressing gasoline in the engine's cylinders instead of igniting it with spark plugs, will make the fuel use more efficient.
"The internal combustion engine has a long way to go in terms of economic viability, and this will bring down its cost dramatically," Al-Khowaiter said in the Bloomberg interview.
Aramco's Detroit and Paris technology centers are working on redesigning gasoline engines to operate like diesel ones, which compress the fuel to make it explode. If successful, this idea can improve the engine's efficiency to more than 40% from around 30%, he said.
Together with U.S.-based engine specialist Achates Power, Aramco is also developing a truck engine using opposed pistons, which should double the mileage obtained from a conventional engine. Al-Khowaiter said the two companies have begun testing, and the first results of the new engine should be available in one or two months.Until concrete results are available, it is difficult to judge how much these efforts add to Aramco's valuation, if at all. But if the company is successful in its efforts to make internal combustion engines more efficient, it would be not only the world's biggest oil producer, but also the owner of technology that makes its main selling product last longer. That will be a compelling investment proposition.