The Risks of Aramco’s Record-Setting IPO, Explained | WSJ

The Risks of Aramco’s Record-Setting IPO, Explained | WSJ


– [Narrator] So, you’re an investor, you’re looking for
places to put your money, and you keep hearing about what could be the biggest IPO of all time. Saudi Aramco. – [Man] The world’s
biggest share offering. – [Woman] The biggest IPO in history. – [Narrator] To be clear,
the share sale is happening on the local stock exchange, the Tadawul, and it’s mostly aimed at Saudi Arabians. – It’s on ATMs, it’s on billboards. The state-owned newspapers
are advertising it. Banks are offering loans for people to buy shares in Aramco. – [Narrator] Aramco isn’t
just any old company. It’s the most profitable one in the world. Its desired valuation,
even on the low end, dwarfs corporate giants
like Apple or Amazon. But its road to going public
has been long and complicated. – Taking the world’s most
profitable company to market has not been an easy job. – It’s all about the valuation. – After years of delay and
amid new security threats posed by rival Iran. – Saudi Aramco announcing plans of course to list on the Tadawul. – [Narrator] So, is Aramco
a good bet for investors? There are a few things
you need to consider. First is how Aramco makes money. Simply put, oil. And that’s great when
oil markets are strong, but going all in on one
asset, in this case oil, means you’re exposed to its value. And that value changes a lot. In 2018, Aramco turned a bigger profit than any other company. Still, the company’s
third-quarter net income this year was down 30% from the same time last year. That’s in part because
of lower oil prices. With all of the uncertainty
around the price of oil, it’s hard to tell if Aramco can grow. And experts can’t even agree on how much the company is actually worth. A very basic way to look at Aramco’s value is based on how much oil
Saudi Arabia has underground. In 2018, the kingdom controlled nearly 18% of the world’s reserves. If Aramco could make a roughly $8 profit on each of those barrels, that would give it a
$2 trillion valuation. But Aramco’s latest price target falls $300-$400 billion
short of the $2 valuation the Crown Prince was aiming for. That lower price target
acknowledges some risks Aramco’s business faces, like tensions in the Middle East, the price of renewable energy, and demand for electric cars. And Aramco’s prospectus
acknowledges that climate change could have a negative
impact on its business. The energy market is changing, and Aramco may have to change too. In 2018, roughly 34% of the world’s energy was fueled by oil, but there’s only so
much oil to be drilled, and the market for renewable
energy is on the rise. The share of renewables in
global energy consumption is expected to grow from
4% today to 15% by 2040. The oil industry has been under pressure from regulators and
politicians around the world to help develop cleaner
alternatives to fossil fuels. – So a lot of the oil majors globally have been making investments
in the last couple of years into new energy businesses. And these can be wind farms, it can be electric
vehicle charging stations. But at this stage we’re not
seeing any big moves by Aramco into renewable energy. – [Narrator] While Aramco itself isn’t investing much in renewable energy, the country of Saudi Arabia wants to. The Crown Prince plans
to use some of the money raised from Aramco’s IPO to make his country less reliant on oil by investing in things like technology, tourism, wind, and solar power. He can do that because the Saudi Kingdom technically owns Aramco, and the Crown Prince can potentially do what he wants with the company, as long as the government controls it. That’s another big
question among investors. Even after an IPO, it might be hard to know exactly where the Saudi government
starts and Aramco ends. Just look at Aramco’s board. Six of the 11 members have
current or former ties to the Saudi government, and the government’s priorities are baked into Aramco’s business plan. Its prospectus even says Aramco might do things for the Saudi Kingdom even if it doesn’t make
the most sense financially. – The Saudi Kingdom is
the shareholder of Aramco, so it has absolutely
been in the driving seat of whether or not this IPO goes ahead. And that has been one of the reasons that the IPO has been repeatedly delayed since it was first announced in 2016. The other issue is ESG, environmental social governance issues. These have been things that investors have been growing
increasingly concerned about, and there’s definitely some
issues around that for Aramco, around environment, around human rights. – [Narrator] In 2018, Jamal Khashoggi, a journalist who was critical of the Saudi Kingdom’s leadership, was murdered by Saudi operatives. While the United Nations and CIA have implicated the Crown Prince in the ordering of the murder, the kingdom has denied his role. After the murder, some investors publicly distanced
themselves from the country by dropping out of a big
Saudi business conference. Now the Saudi government’s
role in Aramco’s future is unclear. Aramco is only putting a small
percentage of its business up for sale, so the kingdom will still
own most of the company after the IPO. That doesn’t just present an
ethical dilemma for investors. It raises tangible security concerns too, since Aramco could be a target for countries at odds with Saudi Arabia. Just think back to September, when a drone attack briefly wiped out half of Aramco’s oil production. Saudi Arabia blamed
Iran for the airstrikes, but Iran has denied its involvement. The cost of recovering from
these September attacks were part of the reason
Aramco’s net profits for Q3 were down 30% from last year. And Aramco’s prospectus said
terrorism and armed conflict could have a significant
impact on its business. While it took less than
a month for the company to return to its original
production output, the attacks showed investors
that Aramco is facing some pretty serious security risks. Even being the world’s largest or the world’s most profitable company doesn’t mean it will
necessarily be successful after it goes public, and the IPO isn’t expected to be the big global offering it
was initially pitched as. After pressure built up
from international investors to disclose more information
about its business, Aramco decided to gear the IPO mainly towards Saudi investors. Aramco declined to comment on a story about its IPO obstacles, and the Saudi government said the IPO has gone “according to plan from day one.” – So is Aramco a good bet? Well, they are guaranteeing a dividend. But on the flip side, it is hard to see what the story for this
company will be in future as we move through the energy transition, away from fossil fuels and
into more new energies. (gentle music)

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About the Author: Oren Garnes

33 Comments

  1. For typical ordinary retail investor in US, UK, Europe then Saudi Aramco IPO is not even accessible. It has been pulled away from merchant bankers and brokers in Western Countries.

  2. The IPO is set to raise approx $25.6 BN against a company valuation of $1.7 TN. By simple maths they are only floating public shares representing approx 1.5% of the companies overall total value.

  3. What would be much more interesting is if they marketed a public IPO of " the worlds biggest and best future Renewable Energy company "

  4. Though the dividends may payoff . It highly unlikely that Aramco can sustain the profits it declares. There are too many outside factors depicted in the video that prevents it from being a lucrative IPO.

    How much oil is there and how costly will it be to extract? Factor in the fact the Saudis have been able to secure its “money maker”, relationships with neighboring countries have degraded and the Saudi royals are not popular with folks in their region. All of this is a negative driving force.

    If the company claims to be profitable then what is need to go public? The company is better off being private. The question is why go public if Aramco is claim to generate more revenue then Apple and Google? As almost as if it’s not enough … greed wears ugly hat on this one.

  5. I’m investing ? don’t care I’ll pull out if it gets messy… maybe a company similar to Gevo will help make fossil fuels more friendly

  6. The Aramco IPO makes absolutely no sense, the amount it will raise will barely cover the cost of its IPO. The only logical reason appears to be the Saudi prince wanting a Saudi company to hold the record of largest IPO.
    The real problem of the IPO is the Saudi govt arm twisting rich Saudis into investing and telling citizens that buying shares in the company is a patriotic duty, banks have been ordered to relax lending rules for anyone borrowing money to invest, what happens in a few years if Aramco shares do not rise or even drop in value and the dividend payments cannot cover the interest on the money borrowed?

  7. The transition to renewable energy will be done by oil companies. All renewable energy businesses don’t make money or file for bankruptcy

  8. World's most profitable company come to WALL STREET TO COLLECT PEOPLES MONEY haha funny man…god bless you….be aware..

  9. Betting on Aramco is essentially betting on the Kingdom of Saudi Arabia and that can mean different things to different people.

  10. Finally the Saudis are selling their souls to the Jews. Instead of controlling their own money with oil now they let the Jews control their money with shares. Armageddon is coming my friends, are you going to worship the Almighty God or are you going to worship the Jews false messiah (Al Masih Ad Dajjal) ?

  11. for all the people who think that IPO will fail , we say as saudis it will success our vision will be real our future will be amazing while you face poverty in your stupid countries and struggle to offer the basics of life we are in our rich country live happly LooooooooooooooL

  12. What an ignorant pop evaluation. "Going all in on one asset is risky!" What frigging investor is going all in on this, who said you have to? The fact is there is unlimited excess cash on hand amongst the Davos Class, and they will be in because if you are not in, you cannot win. Stupid effing report.

  13. 15 years from now, this IPO will be a case study as the world’s worst investment in history, for students in a classroom with a projector powered by solar panels lectured by a professor charging his Tesla in faculty parking

  14. By buying shares of Aramco, you are basically funding the Saudi monarchy…the biggest financier of Islamist terrorism..

  15. is wall Street journal the same press who denied to publish the story about crooks in subprime bonds… what an ethical speech…

  16. I.e Saudi Arabia is going broke.and they're trying to come up with a quick sell before the mass market realizes how useless oil is starting to be NO BUY LET IT DIE.

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