Remember WeWork? Meet We Oil. That’s what the IPO for Saudi Aramco is starting to look like, a revealing failure that unmasks a dark reality.
Although the prospectus was not made available in the United States, Aramco has since announced that it plans to sell roughly 1.5% of the company through the IPO. JPMorgan Chase, Goldman Sachs, Citigroup and Morgan Stanley are all listed among the IPO’s underwriters. Shares will list on Saudi Arabia’s domestic exchange, the Tadawul, next month.
The 25 investment banks involved will now share about $90 million, based on a valuation of $1.7 trillion. Shares will be offered at about $8.50 each. That’s 3 billion shares, a total value of $25.6 billion, available only to Saudis and global institutions.
A Phony IPO?
While the prospectus estimates dividends of $75 billion per year, the yield on that dividend comes to 4.4%. By way of comparison Exxon Mobil (NYSE:XOM) pays nearly 5.1%, BP (NYSE:BP) over 6% and Chevron (NYSE:CVX) just over 4%.
Saudi Crown Prince Mohammad bin Salman once insisted Aramco is worth $2 trillion, almost as much as Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) combined. For comparison, Exxon Mobil is worth $282 billion, BP is worth $130 billion and Chevron is worth $216 billion.
But is this really an IPO at all?
Bloomberg reports wealthy Saudis are being tapped to place big orders for stock. Other citizens may buy even if they must borrow to do so. The Saudi Arabian Monetary Authority is encouraging banks to raise lending limits to accommodate borrowers.
It sounds more like venture funds being hit on a down round than an IPO.
What Happens Next?
Institutions buying the IPO are going to expose themselves to some unique risks. These include the risks involved in war and global warming. They also include accounting risks. Even though very little stock is up for grabs, speculators may still be able to short it, betting that the company’s credit rating isn’t what it appears to be.
The limited size and scope of the IPO means the company can still operate with the government’s interests in mind rather than those of shareholders. For now, this won’t impact questions of war and peace.
But what about new technology? Heliogen, backed by Microsoft co-founder Bill Gates, has demonstrated a solar oven capable of making cement, steel or glass without fossil fuels. Estimates for oil demand by the International Energy Agency continue to fall. The U.S. Department of Energy estimates oil prices will drop further in 2020, despite widespread bankruptcies among shale oil producers.
The Bottom Line on Saudi Aramco
If you offered me stock in Saudi Aramco today, at the same price Saudis are paying, I wouldn’t buy it.
I see the yield as too low and the risks as too high. But that view has serious geopolitical repercussions.
Despite its human rights abuses, Saudi Arabia is a linchpin of the global economy. It’s the source of much of the world’s investment capital. Saudi investors were among the backers of the SoftBank (OTCMKTS:SFTBY) Vision Fund which funded, among other companies, WeWork.
If the profitability of Saudi oil is declining, where is the capital to float new companies and loans going to come from? After its IPO, Saudi Aramco is going to have to file regular financial statements. If it shows oil profits in real peril, what will happen to the rest of the global economy?
Losses are funny when they’re someone else’s. It’s different when they hit your own portfolio.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT and BABA.