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Saudi Aramco


james22
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Saudi Arabia’s new strongman, deputy crown Prince Mohammad bin Salman, known popularly as MbS has revealed some detail on the IPO listing of Saudi Aramco, Saudi Arabia’s state owned oil company and world’s largest exporter.

 

According to latest, Saudi Arabia is looking to list 5% stake of Saudi Aramco and expects the valuation of the company to reach to $2 trillion. The kingdom wants to convert Aramco as a holding company. Subsidiaries of the company will also be listed and its board will be elected and financial information of the company will be released soon enough.

 

http://www.econotimes.com/Saudi-Prince-reveals-first-details-of-Aramco-IPO-199934

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  • 1 year later...
  • 1 year later...

I don't have access to the FT article and no longer follow closely the global supply-demand factors but spent a lot of time in 2015-6 looking into (or more like trying to) Aramco's earning power and would like to add the following:

 

-Net income reported is after various government dividends, taxes and royalties, likely corresponding to "tax" rate well above 50%.

-The Ghawar oil field is still a monster.

-Break-even operating costs (of extraction) probably still stand around 4 to 5 USD per barrel!

-Social safety net costs allowing for sustainable production however probably require oil prices higher than they are now.

-More recent releases of financial disclosure and various "leaks" seem to be related to the IPO and the coming transition.

-The transition has involved selling oil-related assets to buy stakes in Uber and Tesla.

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I'm sorry - my bad, Cigarbutt,

 

I think you should be able to read the article by triangulating this FT Tweet.

Thanks. I enjoyed that.

Other "sources" have mentioned that Saudi Aramco reported net income of "only" $13.3B in 2016 but it shows the operating leverage inherent in a concentrated operation.

It would also be absolutely fascinating to have access to an independent review of their reserves but that may require some arm-twisting.

The long-term evolution of the Saudi Arabia Foreign Exchange Reserves may be a related topic, to be kept for another discussion.

https://www.theglobaleconomy.com/Saudi-Arabia/Reserves/

Last measured (Q3 2018) at $497.2B.

The race is on.

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Here's a piece from Bloomberg on Aramco's financials. https://www.bloomberg.com/news/articles/2019-04-01/saudi-aramco-profit-dwarfed-the-biggest-global-companies-in-2018

 

I'm curious how you'd even go about valuing Aramco. Yes we could model production, revenue, and ebitda but how do we value what a common shareholder is actually going to be receiving. As a common shareholder you're dead last in a long list of parties that have claim to Aramco's earnings, the most important of which being the state itself. What stops Saudi Arabia from levying a higher tax rate on Aramco if it needs more money to meet budget shortfalls? And equally important to our earnings as shareholders, what prevents Saudi Arabia from using Aramco as a public works organization hiring Saudi's to provide employment and salaries that aren't commensurate with their contributions to the company.

 

I think Venezuela's state oil company is illustrative of the perils investors face investing in national oil companies. While I don't think Aramco has the potential to fail quite that spectacularly, the risks of diverting profits and swelling the company's ranks with a layer of party loyalists are real. Common shareholders have almost no recourse in such a situation so I think a hefty discount is warranted, regardless of what top line earnings are.

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There are no miracles:

 

https://www.bloomberg.com/news/articles/2019-04-02/saudi-aramco-reveals-sharp-output-drop-at-super-giant-oil-field

 

It was supposed to pump 5 million barrels/day and now it is down to 3.8 million. So a bunch of lies were provided by the Saudis for many years to shut-up critics.

 

Therefore, their spare capacity is a bunch of baloney and can only come on for a short period of time when you stress their reservoirs and probably hurting their long term productivity.

 

These are all old oil fields and have been sustained by constantly using best EUR techniques. Eventually you reach a peak and production comes down, it is unavoidable.

 

Cardboard

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There are no miracles:

 

https://www.bloomberg.com/news/articles/2019-04-02/saudi-aramco-reveals-sharp-output-drop-at-super-giant-oil-field

 

It was supposed to pump 5 million barrels/day and now it is down to 3.8 million. So a bunch of lies were provided by the Saudis for many years to shut-up critics.

 

Therefore, their spare capacity is a bunch of baloney and can only come on for a short period of time when you stress their reservoirs and probably hurting their long term productivity.

 

These are all old oil fields and have been sustained by constantly using best EUR techniques. Eventually you reach a peak and production comes down, it is unavoidable.

 

Cardboard

FWIW I think these are very good points and I agree that postponing the decline will only result in eventually steeper declines but the big question is when. Who knows apart from a very short list of true insiders?

In the early 2000's (and even before), there appeared several detailed (and convincing) reports showing how the massive output decline was imminent.

 

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Saudi Aramco is a huge variable in the supply equation and hypotheses can be raised but the challenge is data transparency.

Access to capital markets will require some data sharing:

https://www.rns-pdf.londonstockexchange.com/rns/6727U_1-2019-4-1.pdf

 

Not much new actually and "independent" review of some of the proven reserves do not make the assumptions valid.

 

In the last 20 years or so, Saudi Arabia has defied the odds (maximizing primary and secondary recovery) and has raised production levels but essentially increased production levels have come from the same old giant oil fields that were discovered 40 to 70 years ago and for which the depleted status can only be grossly estimated until the market has access to granular production data and field-by-field statistics. I would say Saudi oil economics will look more and more like tight oil with "new" projects offsetting declining overall mature production.

 

The status of Saudi Aramco will play a key role in the grand transition scheme and outside investors will be asked to participate. It is certainly possible that in order to prevent investor interest decline, Saudi Aramco may need to release more information and that may give rise to non-linear scenarios.

 

Saudi Arabia setup an extractive socio-political system based on extraction of a limited resource. Extractive regimes can be very efficient at extraction but do not typically deal well with transitions. Of course another authoritarian group may take over but, in a declining scenario, another Venezuela is also possible.

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A Bloomberg article has come out concluding that the output of the Ghawar field is coming down, perhaps big time.

The conclusion may be correct but I would say that the info in the bond prospectus is not sufficient to reach that conclusion.

 

Historical data is sparse but it has often been assumed that the Ghawar field was producing 5M bpd with a very low decline rate. The 3.8M bpd number found in the bond prospectus is a helpful data input but is reported as an MSC measure which does not automatically correspond to potential production but more to a minimum that can be reached in a certain time frame.

 

https://csis-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/attachments/040224_baqiandsaleri.pdf

(from 2004, page 20)

 

Bottom line: Depletion is real and official predictions are probably way too optimistic but, to this day, it is not widely known to what extent.

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  • 7 months later...

I very much appreciate your three posts from the beginning of April this year, Cigarbutt,

 

The Saudi Aramco IPO Prospectus was relased on November 9th 2019.

 

To me, it feels like a door that has been sealed for several decades, now just opened! [ : - ) ] -I have always wanted to take a look at this company. I plan to dive into it next weekend. I feel confident that it'll be a very interesting read, despite I'm not interested in it as an investment.

 

- - - o 0 o - - -

 

Aswath Damodaran - Musings on Markets [November 18th 2019] : A coming out party for the world's most valuable company: Aramco's long awaited IPO!.

 

 

To me, Saudi Aramco appears like a World Class race horse, and thereby very valuable [, but infertile, so you can't breed on it - in short, one long puff [35 years or so]].

 

- - - o 0 o - - -

 

James [if you read this], about 6 years ago you wrote here on CoBF, that you then were living in Dhahran, Saudi Arabia. Do you still live your life there?

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Does this pose the risk of an (unfairly/unsafely) high representation in worldwide index funds or will the relatively large float stop that from happening?

 

I mean, at their current prposed valuation, in my opinion the regulatory risks (by direct confiscation, high taxation, other arbitrary regulation or running the business not in the interest of minority shareholders) are not properly discounted.

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Think of it as a 'fleecing' exercise ....

1) IPO a portion at a good price. Collect for the state, lots of fee's, 'opportunities', etc ....

2) Spike oil prices (Iran), Inflate the share price and create an exit opportunity.

3) Let the reporting do its work. This thing is sh1te!, the reserves aren't what you thought, price falls like a brick.

4) Hail the saviour. Mandatory buy-back ... off the now 'very low' share-price

5) Negotiate new drilling deals at dirt-cheap prices.

 

And per the Global Corruption Index ...  https://risk-indexes.com/global-corruption-index/

The level of corruption in KSA is very close to that of Russia and China, only marginally less than it is in Nigeria, and about double that of the US/Europe.  ;)

 

Kind of like WeWork ... but this time they actually manage to get an IPO off. 

 

SD

 

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Does this pose the risk of an (unfairly/unsafely) high representation in worldwide index funds or will the relatively large float stop that from happening?

 

I mean, at their current prposed valuation, in my opinion the regulatory risks (by direct confiscation, high taxation, other arbitrary regulation or running the business not in the interest of minority shareholders) are not properly discounted.

Yes, wachtwoord,

 

There are so many red flags here [many of them also mentioned by Cigarbutt in his posts from April this year], that if one looks at the "pricing" section in Mr. Damodaran's blog post, the comparison with regard to market pricing recently of other major Oil & Gas companies, the valuation of the whole Saudi Aramco at USD 1.7 T appears out of line. Many of the described risks related to a stock investment in Saudi Aramco appear to me to be similar - at least partly - to the risks related to buying stocks in the Russian Oil & Gas companies.

 

Personally, I won't be surprised, if this IPO actually ends up failing, alone based on that.

 

Edit :

 

James [if you read this], about 6 years ago you wrote here on CoBF, that you then were living in Dhahran, Saudi Arabia. Do you still live your life there?

 

Still do, yes.

 

James,

 

You are then certainly close by! [ : - ) ] [Note to others : Dhahran is where the Saudi Aramco HQ is located]. If you don't mind sharing - What's the sentiment about this IPO in your community? [- Please note that I respect your privacy - that goes both for if you for professional and/or personal reasons can't or won't comment.]

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I think I would rather deal with the Russian than the Saudi corruption. Valuation are much ore forthcoming too and in Russia, We know what to expect. From what I read, the rich cronies in the SA upper crust are more or less forced to invest, which probably tells you all one needs to know about this. Perhaps this stock is interesting at some point in the future after a steep selloff. For now, it probably should go into the “too hard” or “yuck” file.

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James [if you read this], about 6 years ago you wrote here on CoBF, that you then were living in Dhahran, Saudi Arabia. Do you still live your life there?

 

Still do, yes.

 

James,

 

You are then certainly close by! [ : - ) ] [Note to others : Dhahran is where the Saudi Aramco HQ is located]. If you don't mind sharing - What's the sentiment about this IPO in your community? [- Please note that I respect your privacy - that goes both for if you for professional and/or personal reasons can't or won't comment.]

 

Sorry, really can't comment.

 

(Other than, we're all curious the sentiment about this IPO in the investing community.)

 

Thanks for everyone's thoughts.

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I've always enjoyed Professor Damodaran's valuations, and these two pieces were no exception.

 

I'm just having trouble seeing the fascination with Aramco. Why would someone with choices invest in it over some of the other oil majors or a diversified basket of them. Shell and BP both have 6%+ dividend yields if that's what you're after and you get upside potential if oil should really spike - something the increasing royalty at oil prices over $100 limits with an Aramco investment.

 

I just have trouble seeing the bull case when you could put the same amount of money to work in diversified oil majors with a better yield.

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