Opinion

In a Warming World, Is Aramco Worth a Cool $2 Trillion?

Probably not, but Saudi investors are being given a compelling case to pony up for the oil giant’s stock at whatever price the crown prince wants

Saudi participants at the Future Investment Initiative stand to greet the national anthem in front of a screen displaying images of Saudi King Salman and Crown Prince Mohammed bin Salman in Riyadh, October 28, 2019.
Amr Nabil,AP

If Crown Prince Mohammad Bin Salman weren’t the power behind his dad’s throne in Saudi Arabia, he might have carved himself out a career in Silicon Valley, taking companies public at inflated valuations and sticking investors with the consequences further down the road.

In effect, that’s what the prince, an autocrat and person of interest in the assassination of the Saudi Arabia journalist Jamal Khashoggi, is likely doing with the initial public offering of Aramco, announced on Sunday. Granted, Aramco is no Uber or WeWork. The state-owned oil colossus earns prodigious profits:  last year it netted $111 billion, twice as much as Apple., and is promising to pay a $75 billion dividend to shareholders next year. It is a well-run, efficient operation and is the biggest player in the global oil market.

But that doesn’t make it worth the $2 trillion the crown prince is angling for, nor does it mean that this is the time to try and sell shares.

Aramco’s first problem is that oil and other fossil fuels are in the climate change doghouse.

It isn't that the world is weaning itself of oil all that quickly, as Aramco officials will gladly tell you. In any case, the company is hedging its bets on that account, among other things by investing heavily in energy research and development and by buying 70% of the Saudi petrochemical company Sabic earlier this year. Aramco is betting that even if burning fossil fuel goes out of fashion, turning oil into plastic will remain a good business.

Aramco’s problem is that the financial markets are weaning themselves off oil. Institutional investors, such as Singapore’s sovereign wealth fund Temasek, have hinted that they will reduce their exposure to fossil fuels. Energy’s weighting in the S&P 500 index was 5% in June, less than a third of what it was in 2008. In its latest annual report, Royal Dutch Shell cited divestment campaigns, like Extinction Rebellion, as a material risk. In that environment, Aramco is a tough sell.

Iran is Aramco’s second problem and Donald Trump is its third. As if to spoil Prince Mohammad’s plans, Aramco facilities were attacked in a rocket and missile barrage in September almost certainly by Tehran or a proxy. To the company’s credit, it restored production quickly. But it has not assured investors it can protect its installations – indeed, how can it? Even the mighty Aramco doesn’t have an army.

Donald Trump, who refused to retaliate for the attack, certainly offers no reassurance on that count. On the one hand he is provoking Tehran; on the other, he cringes when Tehran hits back. Aramco is there to take the punch and (who knows?) the next one could be mortal.

The third problem is petroleum prices. Oil is trading at about $60 a barrel and short of another political/security trauma, prices don’t look like they are going anywhere but maybe down. World oil demand is growing very slowly (thanks in part to Trump and his trade wars) and a stream of new oil is about to enter the market from places like Canada and Norway.

IPO and privatization aside, Aramco isn’t just another giant oil company. It is also Saudi Arabia’s piggy bank. The company enjoys extraordinarily low costs and can generate a profit even with low oil prices, but Saudi Arabia’s cash demands are massive: The International Monetary Fund estimates the kingdom currently needs prices at $80-85 a barrel to cover its costs.

Until now, the government has been able to take what it wants without any financial disclosure, much less input from pesky minority investors. Aramco is aware of that problem and has taken steps to assuage that concern, among other things by imposing a gradated royalties scheme based on the price of oil.

Still, in a pinch, it’s hard to believe that Prince Mohammad would risk social unrest to protect investors. Indeed, the credit rating company Fitch downgraded Aramco's bond rating from A-plus in September to A not only because of concerns over future attacks but also due to the “interdependency between the two and the influence the state exerts on the company through strategic direction, dividends and taxation.”

In layman’s terms, in the event of a cash crunch, Fitch is worried that Aramco will have no choice but to favor its Saudi masters over its other creditors when it comes to royalties and dividends. Future equity investors can’t expect better treatment.

If weren’t for ego and the kingdom’s need for cash, Prince Mohammad probably would have put off the whole thing for another day. But he’s been touting the IPO for nearly four years and he needs the Aramco proceeds to help finance his Vision 2030 plan for weaning Saudi Arabia’s economy off oil.

Fair enough, but the crown prince seems determined not only to complete the IPO ASAP but to complete at a $2 trillion valuation. If he gets it, it will be through intimidation and sleights of hand that he can accomplish by selling the stock on the captive market of the Tadawul, the local stock exchange, instead of overseas as originally planned.

The government is telling banks to lend investors' money to buy stock and is offering Saudi nationals who hold shares for 180 days a bonus share for every 10 they purchase. Many of the investment banks advising the kingdom are happy to value Aramco in a range that the crown price wants.

And if that isn’t enough, there are reports that wealthy Saudis, including the ones with fresh memories of being imprisoned in the Ritz Carlton not long ago, are being warned to buy shares, or else. Now that’s a compelling offer: Buy Aramco, or you’ll win an expense-paid vacation at a luxury Riyadh hotel.