Riyadh hits trouble with its Aramco IPO...
As REGULAR readers will know, I've been keeping an eye on the attempts to list Saudi Aramco, writes John Stepek, executive editor of MoneyWeek magazine, in his daily Money Morning email.
The world's biggest oil company is having trouble getting enough interest from buyers.
And yet, it appears that the sale is going ahead.
That speaks volumes about the lack of interest in oil stocks right now.
Saudi Aramco is the world's biggest oil producer. It's currently owned by the Saudi Arabian state.
Owning the world's biggest producer of one of the world's most precious resources should be a good thing. It's certainly made the Saudis rich.
Trouble is, when you have an easy source of riches, you tend not to look for other ones. Owning a golden goose can make you lazy.
How lazy? Well, oil comprises around 40% of the Saudi economy, brings in about 90% of government revenue, and accounts for 90% of exports.
This oil revenue funds a generous welfare state, which helps to pacify a population which might otherwise be prone to causing trouble (there are lots of young men with questionable skill levels and high levels of unemployment).
That's expensive though, even for a country with some of the lowest oil production costs in the world. To pay for it all, notes Tom Holland at research group Gavekal, Saudi Arabia needs an oil price of more than $80 a barrel. Right now, at $60-odd, the country is overspending by about 6% of GDP a year (ie, that's the deficit, which is pretty chunky by anyone's standards).
So, even at current oil prices, the goose isn't laying enough golden eggs. Moreover, when and if the goose stops laying altogether, the Saudi economy will be hugely exposed.
And that's where we are right now. Today, investors the world over are worrying that climate change legislation and the rise in ESG investing will kill off the golden geese in the fossil fuel business.
We've gone from the fear of "peak oil" on the supply side ("the oil is going to run out!"), to fear of "peak oil" on the demand side ("no one wants oil anymore!"). Greta Thunberg may be the latest public face of this movement, but it's been bubbling under for several years now.
As Holland says, one factor in Saudi Arabia's decision to sell off Aramco is "the fear that come the 2030s or soon after, it could be left sitting on 300 billion barrels of 'stranded assets'".
In short, it needs money to diversify its economy according to a grandiose plan labelled Vision 2030. And all it's really got to fund that effort is oil.
So the original plan was to offload about $100bn-worth of Saudi Aramco (5% of the company), which would have given the group a valuation of around $2trn.
That would have been punchy even in better times for oil. As it is, international investors have simply turned around and said: "No thanks."
Previous attempts to launch an IPO (initial public offering) – the first came about four years ago – have foundered at this stage. No $2trn, no deal.
But it seems Saudi Arabia is now keen enough to take what it can get. The decision has now been made simply to list Aramco locally, on the Saudi stock exchange, the Tadawul. On top of that, the company is now just looking to raise $25bn from the IPO – the goal will be to sell 1.5% with a valuation of around $1.6trn-$1.7trn.
This will mostly come from local investors, whose arms can be more easily twisted into demonstrating support. Indeed, as a few comedians have put it, it's starting to look less like an IPO and more like a Saudi wealth tax.
The thing is, to my eyes at least, the resistance to this listing is surprising. Sure, there are lots of elements that are unappealing, such as the fact that you'll be a minority shareholder alongside an authoritarian government, and the potential resulting reputational damage.
But these things have not put investors off buying non-voting shares in tech giants with poor reputations.
It's fair to say that the WeWork debacle won't have helped at a psychological level. Saudi Arabia is a big backer of SoftBank and a whiff of that failure will be hanging over Aramco.
But while Aramco would undoubtedly be expensive at $2trn, Saudi Arabia has made an effort to make it a bit more appealing – offering a chunky dividend yield, for example.
I have to conclude that the real reason international investors don't want a piece of Aramco is simply because fossil fuels are unpopular right now. They've fallen victim to the "jam tomorrow" bubble. Oil is seen as the ultimate old-fashioned industry – it throws off lots of cash, it's not remotely "woke", and most of its business is physical rather than intangible.
Now, to be clear, I don't think that Aramco itself warrants a contrarian "buy". As Holland at Gavekal points out, the Saudis face a real uphill battle to diversify and if they fail to do so then Aramco will be treated as even more of an emergency piggy bank.
But I do think that the failure to get this off the ground – and Saudi Arabia's clear desperation to do so – are indicative of deeply negative sentiment towards the sector. And that's usually a good sign for contrarians.