The New Carter Doctrine Forming: Where will the Saudi Aramco IPO be?

Saudi Aramco IPO - Which Stock Exchange?
The Saudi Aramco IPO - Which Stock Exchange?

One of the biggest battles taking place in financial markets right now is between Hong Kong, London and New York.

Why so?

These are the only three candidates that have a chance of winning the listing for the biggest initial public offering of all time.

That’s the potential US$100 billion offer for around 5% of Saudi Aramco — the national energy company of Saudi Arabia.

The Australian Financial Review reported last week that top officials from all three exchanges are back pitching Saudi Arabia to win the deal.[1]

This deal comes rich in money, quite unlike anything else the world has ever seen. Saudi Aramco is by far the world’s most profitable company.

It made US$46.9 billion in net income in its last half yearly report. That’s more than Royal Dutch Shell, ExxonMobil, Chevron and BP combined.

Any listing comes dripping in intrigue as well. Wherever the Saudi Aramco IPO heads could tell us a lot about power relations in the world right now.

And yet the answer to where Saudi Aramco goes is far from obvious.

For example, you may be surprised to know that the Hong Kong Stock Exchange now eclipses New York’s for the total number of IPOs.

This comes on the back of the surging Chinese capitalist economy. There were 218 IPOs in Hong Kong in 2018, compared to 73 in New York.

Those 218 IPOs in Hong Kong last year raised US$37 billion combined. Saudi Aramco is so huge that it alone would need to raise nearly three times as much.

And yet the protests in Hong Kong are doing more than cancelling flights and roiling Chinese authority.

They have prompted Chinese giant Alibaba [NYSE:BABA] to proceed with plans for a big second float of its own: A US$10-15 billion second listing in Hong Kong.

It’s hard to see Saudi Aramco proceeding if a Chinese company with close connections to the Beijing power base is pausing.

And yet Hong Kong arguably makes the most sense of the three options.

Here’s why…

The natural fit to a Sino-Saudi alliance

China is now the world’s largest crude importer and will dictate the direction of oil markets heavily in terms of demand. China’s energy supply needs are a strategic vulnerability.

It’s even possible we’ll hear the fabled Carter Doctrine ‘with Chinese characteristics’ from Beijing at some point. An attack on Saudi Arabia is an attack on China.

Neither the powerbrokers in Beijing nor the Saudi princes in Riyadh are elected, either. We can at least say they have something in common.

But perhaps it’s the final point I’ll share that’s the most important: Chinese state capital might find a more comfortable home in Saudi Aramco. Western investors now find this kind of thing distasteful.

I don’t mean the link between the Saudi ruling family and the killing of journalist Jamal Khashoggi.

I mean how Western investment markets are turning away from fossil fuel equities in general. They are the new tobacco stocks.

I saw one estimate that suggests the share of oil-related equities in the S&P 500 has fallen from around 30% in 1979 to about 4% today.

‘Green’ and ‘ethical’ funds are attracting large inflows. Western banks are beginning to turn away from financing new coal projects and I doubt oil will be far behind.

Even shale companies in the US are now directing whatever free cash flow they can muster towards dividends and buybacks. The bigger oil stocks prioritise these as well.

Those trends are understandable, but they are not without concern.

OPEC: A return to power?

The world still consumes a lot of oil each day. This investor distaste can only lead to lower investment from the energy industry that will likely show up — at some point — in higher prices for all of us.

The effects of this could be even more perverse. It could return Saudi Arabia’s power base back to its former pre-eminence.

Currently, OPEC’s share of global oil production has shrunk to 30% — the lowest level in years. Saudi Arabia can’t dictate to the world like it once could.

It’s possible, however, that this trend reverses as countries totally dependent on oil, like Saudi Arabia, Iraq and Nigeria, show no environmental qualms.

They’ll gladly take back market share that the Western firms concede in their search for a new, PR-friendly direction.

We saw a small taste of this last week. Major energy company Shell put in a $617 million bid for Aussie energy retailer ERM Power [ASX:EPW]. The EPW share price rocketed up to reflect the bid.

According to the Financial Times, Shell has ‘ambitions to tilt its business towards gasamid the global shift to cleaner energy’.

Indeed. This type of acquisition is notable for where the money isn’t going: Future oil production!

I find this all the more fascinating in the context of the Australian government’s decision to send a military force to the Strait of Hormuz.

This, we are told, is to protect oil supplies from a supposed Iranian threat. This shows that a supply disruption is still a concern for the Western economies.

This is especially true for Australia, which has a pitifully low reserve of oil and fuel products.

At some point in the future, we might just find that Western financial markets raised this risk…by making us more dependent on OPEC…all in the name of good intentions.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch