WHEN $25.6B IS A FAILURE
major global oil companies have operations in dozens of countries. It would take a lot more than a few guys with a vendetta and some flying explosives to take out their frustrations on energy companies that aren’t as concentrated as Aramco. What’s more, in terms of political risk, Saudi Arabia is a lot closer to Russia and Turkey (also run by murderous megalomaniacs) than it is to Switzerland. So Aramco shares should be valued more closely to energy companies traded in those markets, than oil companies in safe and predictable countries where the rule of law actually works. A better comparison for Aramco would be Gazprom, the world’s largest natural gas company. It’s majority-controlled by the Russian government and shares trade at a P/E ratio of around 4. And in the bigger picture, the fact that Saudi Arabia is selling Aramco at all is a bad sign. Aramco at a P/E of 4 would suggest a total market cap of around $450 billion. Let’s be generous and say that Saudi Arabia’s Aramco is twice as safe as Russia’s Gazprom... But even $900 billion would earn you a hard spanking (or worse) from MBS. Somehow, Aramco found buyers at nearly twice that level for its IPO. HOWTHE DEAL GOT DONE Actually, it’s not that much of a mystery. Following some intense arm-twisting by MBS, domestic institutional investors
a higher price, in terms of valuation, for Aramco than he’d pay for a major global oil company that’s been around for decades? It’s the question that any investor who’s looking to buy into an IPO asks – is this new company more attractively valued than what he can buy on the secondary market now? The answer, at least at the market capitalization that MBS wanted, was a resounding no. Why did international investors see Aramco as too expensive? First, there’s the question of corporate governance – that is, whether small shareholders in Aramco could expect to be treated fairly and receive their fair share of profits. Maybe they would... but as the Financial Times pointed out, “Any ruler who arrests his relatives will not listen much to minority shareholders.” (And the Khashoggi incident suggests that MBS doesn’t take a shine to complainers.) On another front, Aramco’s assets – that is, its oil fields – are all in one place: Saudi Arabia. That makes production a lot easier and cheaper. It costs Aramco $2.80 to produce a barrel of crude oil... which it sells today on the global market at around $60/barrel. But it’s also a lot riskier... In September, a drone attack on two big Saudi oil facilities (widely blamed on Iran) cut the company’s crude oil supplies by more than half. The price of oil spiked as much as 20%, and it took weeks for Aramco’s production to come back on line. By comparison, ExxonMobil and many other THE PROBLEMSWITH BUYING ARAMCO SHARES
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December 2019
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