The Biggest IPO of All Time is Coming

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My, oh my. This is going to be important to watch. Saudi Arabia’s national oil giant has come out with two major announcements in the last week or so.

One is that the planned initial public offering of the company may happen as soon as next year.[1] Originally, the date was more distant.

The second announcement, confirmed yesterday in the US, is that it’s the most profitable company in the world by far.

Saudi Aramco’s net income for the half year just gone was an astonishing US$46.9 billion.

To get an idea of how this dwarfs the tech stars in America…

Check out this graph from The Wall Street Journal…

Source: The Wall Street Journal

Now we have a third announcement.

Saudi Aramco — the company — has agreed to take a 20% stake in India’s Reliance Industries for its refining and petrochemical business.[2]

The cost? A lazy US$15 billion.

This looks to be a shrewd move. An alliance with Reliance means a guaranteed buyer of 500,000 barrels of Saudi crude a day going to Reliance’s massive refining complex in Gujarat.

It also positions Saudi Arabia as a key supplier to India when American demand is falling away from the shale revolution.

India is the next big growth market for energy as the middle class expands.

Perhaps the most important thing to watch from all this is the planned US$100 billion float of 5% of Saudi Aramco on one of the world’s stock exchanges.

Which one? We don’t know yet. 

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We do know it’s going to be the biggest public offering of all time. And Saudi Arabia will do everything to make sure that it gets the US$2 trillion valuation it wants for the business.

What does this mean?

Watch for the Saudis to ‘manage’ the market

Propping up the price of oil as much as possible.

A company is valued on the discounted value of future cash flows.

That income stream looks a lot stronger with oil at US$70 or US$80 a barrel than it does at US$50 or US$60.

It should be no surprise to see that OPEC is again mulling more production cuts to prop up the price of oil on the world market.

There are many factors impacting the outlook for oil. The major one on the demand side is a weakening from China as world trade suffers from US tariff policy.

But the US energy business — the source of so much new supply — is beginning to flag from poor cash flow and a declining rig count.

Which declines faster?

We can’t tell today. But it’s going to matter. I just don’t think Saudi Arabia will sell off any part of Saudi Aramco in a weak oil price period. Why would it? It has one chance to cash in.

This potential IPO is very important to watch for you as a market investor — even if you have no interest in oil or energy equities. It’s quite possible that any Aramco IPO marks the top of the market.

Consider the implications. Investment bankers will likely have to raise US$100 billion to finance the float. That’s a record amount of money. The fees will be huge.

Massive deals like this only happen when credit conditions are okay and the outlook relatively benign. This deal was never going to happen in 2009, for example.

And what of the Jeddah Tower? That’s the record tall building that’s due to open in 2020 in Saudi Arabia. It’s going to be the world’s first one-kilometre-high building.

We’ve discussed before how these record buildings usually open in recession. See the dynamic brewing?

The market will be feasting on money gushing from the IPO while the reality on the ground may be more nuanced…

The Yemeni war is getting worse

Then there’s the question of what Saudi Arabia will do with the US$100 billion.

Will the country pump it into the technology sector or create a new city in the desert? It’s a lot of money to throw around.  

The Saudi Aramco IPO is also interesting in the context of all the negative debt trading around the world.

You could at least argue that all that oil in the Saudi desert is real.

A claim on that has some intrinsic value, like gold, as opposed to the reams of paper spewing forth from central banks and governments.

That might look attractive to investors with a worried eye on history.

It’s an awful lot of money we’re talking about here, either way.  

You might think the outlook for Saudi Arabia is all fine and dandy based on this. Not so. Saudi Arabia does have the troubling Yemeni war happening over the border.

The latest from there is not good. There now appears to be a civil war within the civil war. The members of the ‘side’ the Saudis support are now turning on each other.

The Yemeni war puts an ever-present danger of an attack on Saudi oil installations just over the border.

The world seems untroubled by this, naturally distracted as it is by demonstrators in Hong Kong and murderous mayhem in the United States.

But markets have a way of taking us by surprise. Some flashpoint or key event around Saudi Arabia wouldn’t surprise me in the slightest. Stay tuned.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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