Saudi Aramco IPO Investment Club

Posted: 27 Nov 2019 01:27 AM PST

It was recently announced that Saudi Aramco, the largest oil company in the world, is going public. The company supplies 13% of the world's oil (more than the next six biggest oil companies combined).

It is seen by many as a move to diversify Saudi Arabia's economy as part of Saudi Vision 2030.

The Crown Prince had wanted a valuation of $2tn. However, there has been a major reduction in valuation driven by macro outlook for oil prices, and also recent environmental concerns.

There has been a huge range for the valuation - with many banks forecasting a lower valuation than previously expected. For example, the Bank of America has a range of $1tn in their valuation! An international roadshow aimed at selling Aramco's shares has been scaled back after investors baulked at the price tag which is based on decades of predicted future oil production and high global prices. It describes "long-term value creation through crude oil price cycles" and improving sustainability "by leveraging technology and innovation to lower our climate impact". SO EVEN THEY STATE THAT THE CRUDE OIL PRICE IS A HUGE PART OF THEIR VALUE PROPOSITION AND UNDERSTAND THE CLIMATE IMPLICATIONS.

The firm said it has no current plans for a foreign share listing, saying long-discussed plans for a two-stage IPO including an offering on a foreign exchange had been put aside for now. Let's have a look at the macro outlook for oil prices...

Here is the crude oil chart (watch video, and subscribe and like!)

We can see there is a clear channel between $20-40 that ranged for a couple of decades, before spiking from around 2004 to a top of around $150 in late 2007, we've seen a broad decline since then. We had a sharp crash in 2008 with the Great Recession and all, and then a bounce back up to around the $100 range and then a sharp correction in 2014 - now we currently sit around $56. Generally, we're seeing lower highs on this chart and lower lows. So it's worth bearing (pardon the pun) in mind, that we could see it go back to this $20-$40 range in the coming years.

Perhaps we'll continue to see an acceleration of global demand and we won't have a recession despite the best efforts of the yield curve, and it could go up? But, as highlighted by the investor sentiment from an environmental perspective and also the general shift to electric vehicles [insert cliche Elon Musk Cybertruck reference], this seems increasingly unlikely.

Despite this, the profits are phenomenal and there is the value proposition of huge dividends. They will now focus on investors in Saudi Arabia and the Gulf, and recent news indicates that they are on track: The arrangers of the IPO have indicated in private discussions that they already have nearly enough orders to cover the institutional part of the deal. Fund managers have until December 4th to subscribe to the deal. So it will be interesting to see how this plays out...

What are your thoughts? Are you bullish or bearish on Aramco?

https://www.youtube.com/watch?v=eJ1rgHWlle8

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