Saudi Aramco’s $2T Zombie IPO(bloomberg.com)
bloomberg.com
Saudi Aramco’s $2T Zombie IPO
https://www.bloomberg.com/news/articles/2018-07-07/saudi-aramco-s-2-trillion-zombie-ipo
59 comments
The Aramco ipo is less urgent after MBS extracted well over 100 billion from his tribal cohort https://www.hindustantimes.com/world-news/saudi-arabia-says-...
Yup - OP mentions this, buried towards the middle of the article.
"He may also not need the money as much as he did at the outset of his mission to change the country. Saudi authorities this year reached agreements to recover more than $100 billion (the same amount the Aramco IPO was supposed to provide) from a controversial corruption investigation that saw many of the kingdom’s most prominent subjects imprisoned at the five-star Riyadh Ritz-Carlton. "
"He may also not need the money as much as he did at the outset of his mission to change the country. Saudi authorities this year reached agreements to recover more than $100 billion (the same amount the Aramco IPO was supposed to provide) from a controversial corruption investigation that saw many of the kingdom’s most prominent subjects imprisoned at the five-star Riyadh Ritz-Carlton. "
Just to underscore the argument that they want to diversify the economy, about 45B of SoftBank's massive fund is from SA's Public Investment Fund.
https://techcrunch.com/2017/08/09/how-softbanks-100b-fund-is...
That's a lot of money even for SA. ($100B is a nice round number, approximately equal to the amount they would raise in the IPO, the amount they "extracted" during their corruption drive, and the amount of Softbank's total fund.)
https://techcrunch.com/2017/08/09/how-softbanks-100b-fund-is...
That's a lot of money even for SA. ($100B is a nice round number, approximately equal to the amount they would raise in the IPO, the amount they "extracted" during their corruption drive, and the amount of Softbank's total fund.)
They have a lot of money, I just don't know if that is enough.
The thing is Saudi Arabia has tried to diversify its economy many times before... it hasn't gotten it done. They have a huge gut of workers entering the workforce soon and it seems they are they're not educated enough to compete.
A nice man I met from SA noted that education in SA was still heavy on religion, and all his friends aspired to comfortable government jobs that are easy, and pay well, as that has been the place to be for decades.
I'm not sure you can fix that in say 20 years....
The thing is Saudi Arabia has tried to diversify its economy many times before... it hasn't gotten it done. They have a huge gut of workers entering the workforce soon and it seems they are they're not educated enough to compete.
A nice man I met from SA noted that education in SA was still heavy on religion, and all his friends aspired to comfortable government jobs that are easy, and pay well, as that has been the place to be for decades.
I'm not sure you can fix that in say 20 years....
if you're a native Saudi citizen you pretty much are guaranteed a very cushy govt job plus tons of perks (free education, interest free loans for building a home etc). Many parts of the middle east work like this (relying on expats to do all the real work).
It will take generations for this mentality to change (if it ever can..) and by then the oil will have run out.
It will take generations for this mentality to change (if it ever can..) and by then the oil will have run out.
Yes, I once did a consulting project in Kuwait (considered one of the better places in the region) and they wanted me to consider joining as an employee. I talked to someone I knew in HR in another company over there regarding how much could I angle for and whether it was a good idea.
He told me that for the exact same job if a Kuwaiti (or American (because liberators)) would be paid $100, another white guy would be paid $70, and as an Indian I could expect $30 or so. He told me I could negotiate a bit more because I have a PhD from US but not that much. This would still have been several times what I would make in India. I declined.
He told me that for the exact same job if a Kuwaiti (or American (because liberators)) would be paid $100, another white guy would be paid $70, and as an Indian I could expect $30 or so. He told me I could negotiate a bit more because I have a PhD from US but not that much. This would still have been several times what I would make in India. I declined.
Yeah I fear like Greece with the aversion to paying taxes, they may have a fundamental behavioral issue that will just snowball...
Granted I get why people do what they do, but as a whole, it could be disastrous. Much like your expat story, I recall a blog post by someone who went to SA for work. They enjoyed it, but they didn't get why they were even there doing the work as the people they reported to seemed to do little to nothing and could have ... just done their job, but at the same time they weren't sure those people could do that job, or much at all :(
Granted I get why people do what they do, but as a whole, it could be disastrous. Much like your expat story, I recall a blog post by someone who went to SA for work. They enjoyed it, but they didn't get why they were even there doing the work as the people they reported to seemed to do little to nothing and could have ... just done their job, but at the same time they weren't sure those people could do that job, or much at all :(
> A nice man I met from SA noted that education in SA was still heavy on religion, and all his friends aspired to comfortable government jobs that are easy,
I can confirm this from a second-hand account as told by one of my best friends. He worked as a sub-contractor in Saudi Arabia for a couple of years for a big European air/defense firm and he told me that the technical education of his Saudi colleagues was sub-par, to put it mildly, mostly because they were still taught the Quran during engineering school.
I can confirm this from a second-hand account as told by one of my best friends. He worked as a sub-contractor in Saudi Arabia for a couple of years for a big European air/defense firm and he told me that the technical education of his Saudi colleagues was sub-par, to put it mildly, mostly because they were still taught the Quran during engineering school.
IPO is meant to raise capital (for growth) and to provide liquidity to existing shareholders.
Saudi Aramco needs neither of these.
Be very wary of investing in this IPO. The end of oil is coming - even Saudi Aramco knows it.
Saudi Aramco needs neither of these.
Be very wary of investing in this IPO. The end of oil is coming - even Saudi Aramco knows it.
One shareholder (Prince Mohammad bin Salman) needs 500B to finance his project of starting a city from scratch to compete with Dubai. (project Neom if you want to google it). He also wants to feed some money in a tech investment fund (solar energy and AI). That's the main reason behind the IPO IMO.
And shareholders would probably be more interested in the oldest reason to buy stocks: getting a share of the profits as dividends. If oil supply becomes insufficient before the Saudi reserves dry up, the prices will skyrocket and so will the profits.
Sure, it won't last 100 years, but if you are looking to get dividends within 20 years, that's not necessarily a bad deal.
And shareholders would probably be more interested in the oldest reason to buy stocks: getting a share of the profits as dividends. If oil supply becomes insufficient before the Saudi reserves dry up, the prices will skyrocket and so will the profits.
Sure, it won't last 100 years, but if you are looking to get dividends within 20 years, that's not necessarily a bad deal.
I would think, or at least hope, that 500B could buy peace in Yemen and that he could pick a city there to refurbish from scratch.
Probably can't. Saudi military strength in Yemen is not limited by budget, so doesn't help with a military solution. And the issues of control and religion and security over which the war is being fought can't really be made to go away with money, so wouldn't help too much with a political solution.
In any case, building up a city in Yemen would not strengthen the Saudi state and MBS's personal political power in the way that a new and rich Saudi city would.
In any case, building up a city in Yemen would not strengthen the Saudi state and MBS's personal political power in the way that a new and rich Saudi city would.
Well he wants a city populated by hipster close to a trade route and also to use it as a way to normalize relationship with Israel and "experiment" a non-sharia area in KSA.
Such a project will require being careful about who gets there.
Such a project will require being careful about who gets there.
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That may be true for companies, but not countries.
Saudi aramco is doing an IPO to help fund their 2020 plan and to further diversify their economy and create ties with foreign economies.
This is one of the best deals available
Saudi aramco is doing an IPO to help fund their 2020 plan and to further diversify their economy and create ties with foreign economies.
This is one of the best deals available
Also in the past, the Saudi government has threatened to nationalize the then Arabian American Oil Co. (or Aramco) [1] company. At the time it was an American company and this forced the company to share profits with the kingdom. It will not be good if history repeats itself and government threatens to rob your property
[1] https://en.wikipedia.org/wiki/Saudi_Aramco#History
[1] https://en.wikipedia.org/wiki/Saudi_Aramco#History
I kind of hate the oil industry because of damage to the world. I own an electric car. Even with those feelings, it's also very clear we'll continue to have massive profits for this industry during the next few decades. At least 5-10 years of current sized profits - because it will take a long time to make enough cheap evs and build infrastructure.
Maybe not at that massive valuation of 2T though.
Maybe not at that massive valuation of 2T though.
Do you own any index funds (most of which have oil holdings)?
I'm sure I do own some index funds that own big oil. I can still dislike the practices of a company that I own some of. I don't always have the possibility of constructing my own index funds separate from the opportunities that my company 401k offers.
Overall I see this as a milestone in SA history. They are anticipating the death of the oil market. Many people think it's unwisw to play games with what is essentially their entire economy. But I guarantee if you knew what SB has planned, you would find it hard to see any other path forward
So what do they have planned?
MBS is very smart and he has shown an appreciation for precedant in his nudging forward of social reform. I guarantee that he plans to cement his name in history by implementing another very large reform -- the transition of his countries economy from soley oil to no oil at all (in time). His goal is to create a kind of scandanavia of the middle East (economically, not culturally). I know this because I know that he knows that oil is as good as dead -- the transition to renewable energy is so far underway as to be undeniable. The interests of all the biggest economies except Russia align firmly with this transition. There is simply no future in oil and he knows it. The only move that would be characteristic of MBS and the country as a whole would be to rise to the challenge of this transition while maintaining the prosperity and prestige that they currently enjoy. And all of the above leaves little doubt about what they will try to do.
I should clarify. He will try to make SA a source of innovation, investment and so on like the United States, Germany, Sweden, Norway, estonia, and other such countries -- robust, diverse economies that are driven primarily by the high levels of education and training observed by their populations.
I should clarify. He will try to make SA a source of innovation, investment and so on like the United States, Germany, Sweden, Norway, estonia, and other such countries -- robust, diverse economies that are driven primarily by the high levels of education and training observed by their populations.
He will most probably fail, but somewhere in the middle so maybe still not a bad move long term.
Local population is lazy, and will remain lazy until they face poverty, which will be too late to maintain prosperity. The only solution that might work is to create some tax-haven for foreign companies with massive grants. Maybe.
Local population is lazy, and will remain lazy until they face poverty, which will be too late to maintain prosperity. The only solution that might work is to create some tax-haven for foreign companies with massive grants. Maybe.
There are many reasons to sell equity, but only one to buy. Now this doesn't mean only lemons are on the market, but generally proven businesses with a bright future aren't for sale unless at a very steep premium.
There are plenty of cases where very legitimate business need to sell stock to raise capital. But SA does not need capital. So looks to me like a way to extract additional wealth from the world before it becomes even more obvious that SA will fail when oil slowly becomes irrelevant.
After speding a few years in the middle east, this is how things go over there.
Things only moves if it's senior management priority. Now that MBS has found
enough cash through his corruption probe, the IPO is not his main focus
anymore, and things wont go forward until he personally pushes for it.
Right now, his main focus is to make sure the Iran does not develop it's O&G infrastructure, that could challenge KSA's position. One part the the article does not explore, is "what did the US gave in exchange of the OPEP increasing their production?". Could it have something to do with the WH ending the Iran deal?
One part that is extremely true is that investing in the GCC is extremely risky, due to the way regulation can change within weeks. Most people that I know over there thinks that without a good, personal relationship to the royal family (or equivalent), having high stake investments is probably a mistake.
Also, i'm highly skeptical with the 20% marginal rate this article talks about. I remember reading that the cost of production of a barrel in KSA what about 3$.
Right now, his main focus is to make sure the Iran does not develop it's O&G infrastructure, that could challenge KSA's position. One part the the article does not explore, is "what did the US gave in exchange of the OPEP increasing their production?". Could it have something to do with the WH ending the Iran deal?
One part that is extremely true is that investing in the GCC is extremely risky, due to the way regulation can change within weeks. Most people that I know over there thinks that without a good, personal relationship to the royal family (or equivalent), having high stake investments is probably a mistake.
Also, i'm highly skeptical with the 20% marginal rate this article talks about. I remember reading that the cost of production of a barrel in KSA what about 3$.
How much is the offering discounted in the eyes of the investors because it is not issued by a "normal" company, but a dictatorial state ?
The article discusses how investors are leery of downward pressure on crude oil prices and government fiat.
If you want to be cynical, investors don't need true rule of law as long as the courts respond to their needs.
If you want to be cynical, investors don't need true rule of law as long as the courts respond to their needs.
Without knowing much about the details: it seems misguided to put the entire economy of a nation on the stock market.
It actually seems pretty savvy. If you are 100% consolidated in a single commodity it makes sense to diversify. Who knows what the actual numbers look like and if institutional investors can get confortable, but the article seems to indicate that they would raise 100b which means they are selling like 5%. So it doesnt sound like they are giving up control anytime soon.
Isn’t that a huge if? All articles like this have made it seem like getting a $2T valuation is not happening.
Every developed country which supports itself by selling bonds to pay for its expenses is effectively putting its economy "on the stock (bond) market"
bonds have essentially a capped upside, and are pretty similar to debt which is vastly different from equity.
Bonds are “similar to debt” in the same way that oceans are “similar to large bodies of salt water”.
You're totally missing the point of my comment. I'm not a native english speaker so perhaps I didn't get my point across quite clearly - Bonds/Debt are a totally different thing compared to equity (IPO).
thanks for the financial insight
stay savvy hacker news!
stay savvy hacker news!
Also water is wet.
No, the government is putting itself on the market.
They're looking to hard core diversify, as is Saudi Arabia is very much a banana republic.
> Saudi Arabia is very much a banana republic
Banana republics are characterized by political instability. They also at least pretend to be democracies. Saudi Arabia is relatively stable and is an openly-absolute monarchy.
Banana republics are characterized by political instability. They also at least pretend to be democracies. Saudi Arabia is relatively stable and is an openly-absolute monarchy.
I was always under the impression that banana republic simply meant that economy was a one business type deal and generally controlled by state plutocrats and oligarchs. So I did a quick look up on Wikipedia[0], perhaps the phrase has different connotations in our local dialects of English but Wiki didn’t make any mention of presumed democracy.
Further I’d argue that the ascension of MBS to the de facto head of state qualifies as evidence of instability. Also the very nature of a banana republic’s economy make the government unstable because people generally only grab their torches and pitchforks when they go from having food to not having food. If your economy stands on one leg then you’re one disruption away from not having an economy and therefore not having food.
[0] https://en.wikipedia.org/wiki/Banana_republic?wprov=sfti1
Further I’d argue that the ascension of MBS to the de facto head of state qualifies as evidence of instability. Also the very nature of a banana republic’s economy make the government unstable because people generally only grab their torches and pitchforks when they go from having food to not having food. If your economy stands on one leg then you’re one disruption away from not having an economy and therefore not having food.
[0] https://en.wikipedia.org/wiki/Banana_republic?wprov=sfti1
Not to contradict you, but everything is stable until it's not. A three legged stool is stable until one leg breaks.
Seriously. I mean... Aramco was originally subsidiaries of American petrochemical companies which was "bought" by the Saudi Royal family effectively nationalizing it. This doesn't make any sense at all...
It does, they're trying to diversify their economy beyond oil. The IPO is part of getting capital for a sovereign wealth fund.
How does floating their state business on the stock market diversify their economy? If anything, dollars that might have been invested in non-oil industries will instead purchase aramco stock. The national economy will be only more dependent on oil.
Right now Saudi Arabia owns an uncertain stream of future profits from Aramco. By selling stock, they are converting a small portion of that uncertain stream of future profits into a bigger pool of money upfront that can be diversified away from oil. For example, they can invest those dollars into SoftBank's giant funds, which are investing in ridesharing companies like Uber, Lyft, Didi, Cruise Automation, etc.
You are right that every dollar Saudi Arabia pulls out of Aramco is a dollar that someone else puts in. But hopefully these transactions are win-win by reducing Saudi Arabia's overall risk.
Plus, putting Aramco on the open market may lead to more accurate information about its worth, which would help Saudi Arabia plan better.
You are right that every dollar Saudi Arabia pulls out of Aramco is a dollar that someone else puts in. But hopefully these transactions are win-win by reducing Saudi Arabia's overall risk.
Plus, putting Aramco on the open market may lead to more accurate information about its worth, which would help Saudi Arabia plan better.
they're trying to use the cash from the IPO to fund a wealth fund to create investment within the country.
Sure, that would be a one time cash bonus raised from the IPO. Couldn't they instead just funnel the cash earned from Aramco to fund whatever they have in mind?
My gut tells me its more cargo-cult than anything concrete: MBS just wants to show everyone that the worlds most valuable corporation is Aramco; and wants to curry favor with the elite bankers (and everything that comes with those kinds of relationships) who would make a killing from the IPO.
My gut tells me its more cargo-cult than anything concrete: MBS just wants to show everyone that the worlds most valuable corporation is Aramco; and wants to curry favor with the elite bankers (and everything that comes with those kinds of relationships) who would make a killing from the IPO.
There is literally no difference. The value of Aramco is the discounted value of all future cash flows. So selling 5% in an IPO is equivalent to selling 5% of all future cash flows (discounted appropriately). This allows them to diversify now rather than later/gradually.
There are other non-financial advantages of having at least partial public ownership of a publicly owned company like Aramco, like increased transparency and accountability.
There are other non-financial advantages of having at least partial public ownership of a publicly owned company like Aramco, like increased transparency and accountability.
There is actually a critical difference depending on your oil market projections, which is why they're diversifying now rather than later. A very optimistic projection would be that Saudi can gradually extract & sell most of their oil before the clock runs out. If that doesn't happen, they could lose a large amount of value as global energy markets change dramatically over the next 30-50 years. Half of the US oil consumption is gasoline (9.3 million barrels per day oil equivalent, nearly equal to Saudi's output), and that's almost entirely going away with the switch to electric vehicles in the coming decades. China - the world's other giant oil & gasoline consumer - will similarly move almost exclusively to electric vehicles, as will the rest of the developed world. If you're a petro state, you don't want to be sitting on 100 years worth of oil and betting on extracting annual payouts from it over that time (comparable to what they can get for it now).
Americans will only switch away from gasoline burning cars when the price makes it un-affordable or there is a supply shock.
Having a cheaper electric alternative to a gas auto with similar or better performance will quickly make gas vehicles seemingly "unaffordable". Very few Americans will stick with a combustion engine if it is the more expensive alternative.
In other words, gas prices don't have to rise, electric vehicle prices need to continue to fall. Which they will.
In other words, gas prices don't have to rise, electric vehicle prices need to continue to fall. Which they will.
I could drive much less (I drive below average miles anyway though) and I could get a much more fuel efficient car. I'm not going to get a house with a car charger, so it's unlikely I will get a rechargeable car, let alone one that is fully electric. My apartment complex has one charger for hundreds of units.
Incidentally, there is a charger near the gym I go to and I noticed that it does not display the price in advance. If regulators do not force electric car chargers to show prices like gas stations do, it tells me nobody is serious.
Incidentally, there is a charger near the gym I go to and I noticed that it does not display the price in advance. If regulators do not force electric car chargers to show prices like gas stations do, it tells me nobody is serious.
If electrics get down to the price range that apartment dwellers are buying them, you can be sure that the number of chargers will increase dramatically.
As for charger pricing, most chargers I see out in public are free. They don't display the price of gas in Venezuela at gas stations because it is too small to account for.
As for charger pricing, most chargers I see out in public are free. They don't display the price of gas in Venezuela at gas stations because it is too small to account for.
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There's this: Five Stop Signs along Saudi Aramco's IPO Road https://www.linkedin.com/pulse/five-stop-signs-along-saudi-a...
and this: U.S. Court Says "No" to Aramco IPO? https://www.linkedin.com/pulse/us-court-says-saudi-aramco-ip...
and this: U.S. Court Says "No" to Aramco IPO? https://www.linkedin.com/pulse/us-court-says-saudi-aramco-ip...