Investing in Aramco: why I would not touch it
The curious case of Saudi’s trillion dollar oil company going to the market
At a time when the markets are starting to take in account governance and climate change as a risk, they are confronted with a record IPO of a very special company: Aramco. The Saudi Arabian Oil Company is Saudi’s public petroleum company. In 2018, the company had $336 billion of sales with a net income of $111 billion. The Kingdom of Saudi Arabia, with the second largest reserves of crude oil in the world, owns a 100% of Aramco.
Only 2% or 3% of the shares of the company will be offered by the Kingdom for sale. The amount might reach as much as $60 billion.
Some financial sweeteners have been added to those shares; shareholders will benefit from a special dividend. Talks about bonus payouts and reduction of the preemptive dividend of the Kingdom appeared in the media. However, the unique nature of this company and its leadership may make it a tougher sell, according to the Financial Times. The IPO further suffers from safety concerns due to recent attack on Aramco’s oil fields by allegedly Iranian drones.
The valuation of Aramco
We have become familiar with strange valuations. WeWork could not sell at $8 billion while it was priced at $47 billion a few months earlier. Aramco however is a premiere.
In an IPO, a preliminary prospectus allows the managers of the operation to approach investors with a price range. In the case of Aramco, this offering is based on a $ 1.2–2.3 trillion valuation. In other words, the underwriters have no clue about the price at which investors will be willing to buy the shares. It seems that the highest value was a request of the Kingdom. Recent valuations point more to $800 billion than $2 trillion.
This is not only laughable, but the SEC will have to respond to critics who consider that they have been complacent by accepting a 100% range (called “spread”) between the lowest and highest values. It beats the objective of the preliminary prospectus that generally indicates a spread of about 10%. Market volatility does not explain why the valuation is so imprecise.
A non-ethical company?
Over the past decade, companies have attempted to develop policies that would qualify them as respecting basic principles of Environment, Social and Governance (“ESG”). None of those principles apply to the Aramco shares. The company is almost exclusively producing fossil fuel, has been known for poor social standards and, even more importantly, has a governance dictated by the Saudi government that is effectively composed of the most reactionary Islamic faction of the Wahabites.
ESG investors should therefore abstain from subscribing to this offering. However, it is hard to point to a particular underwriting bank since nine of them have been selected: JP Morgan Chase and Morgan Stanley as lead managers, Bank of America, Goldman Sachs, Credit Suisse, Citigroup, HSBC, as well as the Saudi banks Samba and NCB Capital. The competition for this golden mandate took five years. The fees will reach $3 billion: not something banks can refuse at time when their other capital market businesses start losing money.
Not a detail: Prince Mohammed Bin Salman
Behind the transaction, is the iron fist of 34-year old Prince Mohammed Bin Salman (“MBS”) who is selling the shares and virtually managing the company. He is the effective leader of the country and has recently caused extorsion by putting his cousins and brothers in a “golden jail” (the Ritz Carlton), ordering the brutal murder of journalist Jamal Kashoggi in Istanbul, and fueling the war in Yemen. He pretends to support women. To be fair, women can go to football stadiums and drive cars now. However, he is still flogging internet activists and not opposed to stoning “adultery” women to death.
Subscribing to the IPO is a vote of confidence in MBS and the Saudi Royal Family. MBS needs this IPO to fund his leadership — which raises obvious concerns. The real reason why the spread between the offered and bid price of the IPO is so wide is that, for the first time, ESG considerations might affect the primary market both in pricing and in volume. It is in a sense a test for ethical investors.