Let's do a mental exercise.
Imagine a company whose annual turnover surpasses the economies of many entire countries.
A company that produces more than 10% of all the oil in the world and controls more oil
reserves than any other country, except Venezuela.
Such a colossus would be the greatest business power of all time.
A company that could alter the entire world economy by itself.
That is, a simple board of directors meeting would be more important than virtually any
decision of any government.
Well...
Dear friends of VisualPolitik, that company exists and has now gone public.
Yes, we’re talking about Saudi Aramco.
Ok, you may not have heard of it, but this company controls and manages practically all
the oil fields in Saudi Arabia.
This giant is worth almost two trillion dollars in the market and can reap profits of more
than 100 billion per year.
To give you a comparison, that’s more than the combined profits of the world’s five
largest private oil companies.
It’s a massive difference, check this out:
(CHART)
And what’s more, ARAMCO is also one of the largest petrochemical and petroleum refining
groups.
For example, it controls refineries throughout the world, including the largest refinery
in the United States.
Basically, in terms of fueling a car, this company’s decisions are going to matter
almost as much or more than your own government’s decisions.
So what exactly lies behind this company?
Why has Saudi Arabia put its crown jewel on the market?
And exactly how far can this giant reach??
Listen up.
(GOING ON THE MARKET)
On December 11th, 2019, shares for Saudi Aramco Oil Company began trading on Tadawul, Saudi
Arabia’s stock exchange.
The Saudi government barely sold 1.5% of the shares, but that was still enough to make
it the largest public offering of all time.
They sold shares worth $25.6 billion.
This money will nurture the Public Investment Fund’s coffers, a fund that aims to invest
in companies and sectors beyond oil.
Because that’s the goal.
You see, almost all the countries in the Persian Gulf, which basically only produce oil and
gas, are going crazy trying to diversify their economies so they won’t be so dependent
on these raw materials.
But not everyone is in the same position.
For some countries like Kuwait, Qatar or the United Arab Emirates, this isn’t an urgent
matter.
After all, as we told you before on this channel, they have huge resources, huge reserves of
money, and very small populations.
For example, in this video we told you how Abu Dhabi’s savings surpass one and a half
trillion, one and a half trillion dollars per Emirati citizen.
However, Saudi Arabia’s situation is very different.
The country of the House of Saud does indeed have vast oil reserves, the second largest
in the world after Venezuela, but the problem is that its population is nothing like that
of Kuwait or the Emirates.
That is, in per capita terms, their resources are much, much smaller.
(CHART)
And not only that, Saudi Arabia is a very young country with high population growth
rates.
We’re talking about a country where 40% of the population is under 25 years old.
And yes, historically, oil has allowed them to finance practically everything: large urban
projects, free education and health care, public jobs, a guaranteed income program,
etc.
However, with a significant portion of the population aging, the situation is becoming
increasingly complicated and the fact is that the government has a huge glitch in its public
accounts, a deficit of almost $50 billion per year.
And this figure of $50 billion was only achieved after applying several cuts, new taxes and
after the price of oil recovered.
And still, it’s $50 billion.
And that’s precisely where one of the great protagonists of this story comes into play,
the crown prince Mohammed Bin Salman, of whom we’ve already talked about here on VisualPolitik
and who today runs the country.
You see, in January 2016, Mohammed Bin Salman announced his intention to put 5% of Aramco
on the market to finance his Vision 2030 program, a plan that was born with one goal: to reduce
the country’s huge dependence on oil.
Because almost 70% of all of the Saudi government’s income and 80% of its exports depend on this
raw material.
What’s more, in Saudi Arabia, non-oil activity depends largely on public spending, which
in turn depends on oil.
In other words, it’s very hard to find a sector of the economy that doesn’t, in one
way or another, depend on hydrocarbons.
We’re talking about an economy that’s addicted to black gold.
And of course, in a landscape with more and more producers, where fracking has become
a powerful rival and where concerns for the environment and global warming could curb
oil consumption, this dependence is a problem.
Because if we also consider that the young Saudi population expects a certain way of
life, the country clearly needs to seek alternatives.
And that was precisely the intention, to gradually sell its stakes in Aramco to obtain money
with which to finance other projects, to create new jobs and reduce the country’s dependence
on oil.
But... as we often say, the road to ruin is paved with good intentions..
Here’s a question, do you think that releasing this giant into the stock market was a success?
You could easily be drawn to that conclusion, after all, the Saudi government got more than
$25 billion.
Well... if you think so, you’re very, very wrong.
In spite of the huge headlines that we may have read in the media, the truth is that
Aramco's IPO wasn’t easy or successful.
Let’s take a look.
(THE LARGEST COMPANY IN THE WORLD)
By being listed on the stock market, Aramco has become the wealthiest listed company in
the world.
In fact, within a few days of trading, its market value surpassed $2 trillion.
(AUDIO: Aramco Valuation Hits Crown Prince’s Coveted $2 Trillion Target.
WSJ)
But, just a second, because this the background to this story is very, very different.
You see, when Mohammed bin Salman announced his plans, he wanted to list Aramco in one
of the great world markets, such as New York, London or even Hong Kong, that is, within
reach of practically every investor in the world.
And not only that, he intended to sell 5% of the company in order to raise at least
one hundred billion dollars.
But...
In the end, that entire project ended with the sale of just 1.5% of the shares... and
only on the Saudi Arabia Stock Exchange Market – which financially, is fairly insignificant..
So, the question that crops up is, what on earth happened to cause such a change?
Well, the truth is that going into one of the big markets involved two major problems:
On the one hand, these markets demand high levels of transparency and compliance with
many regulations, for example, the protection of small investors...
And that, for one of the murkiest companies in the world, which has been cashing blank
checks for the Saudi royal family for years, well... just wouldn’t work.
The prospect of transparency for a government that’s used to doing what it wants, when
it wants, and how it wants was all too much.
And on the other hand, there was a much bigger problem, which they couldn’t escape.The
Saudi government was forced to face a harsh reality: the market wasn’t willing to pay
what the Saudi government requested for Aramco.
Yes, it may be the world’s largest oil company and have the lowest extraction costs… but
it’s still a company controlled by one of the most authoritarian and strictest regimes
in the world.
(AUDIO: Aramco should trade at a discount rather than premium to international oil majors.
We rate Saudi Aramco as underperforming.”
Analysts at Bernstein to Financial Times)
And don’t forget that we’re also talking about the Middle East, one of the most volatile
regions on the planet, where it isn’t strange to see things like this:
(AUDIO: May of 2019.
Saudi Arabia Oil Pipeline Damaged in Drone Attack by Houthi Rebels Armed drones forced
shutdown of pipeline; incident follows attack on two of the country’s oil tankers.
WSJ)
(AUDIO: September of 2019 Saudi Aramco reveals attack damage at oil production plants.
Twenty-five drones and missiles were used in the attack that forced the kingdom to shut
down half of its oil production, Saudi Arabia has said.
CNBC)
Not to mention the dire situation of the country’s public accounts.
Because... whatever happens, the truth is that Saudi Aramco will continue to finance
the Saudi government, not just with dividends, but also by paying lots of taxes: No less
than 20% on its income and 50% on benefits.
But even with those payments, the numbers don't add up.
Neither above nor below, not one way or another.
They simply don't add up.
And with a shortfall of $50 billion in the public accounts, how do we know that the Saudi
government won’t repeat what they did in the past?
That is, keep draining the cow:
(AUDIO: If oil prices are lower, you could expect that the state would potentially increase
taxes.
The promise to maintain high dividends to non-state shareholders, he points out, would
not be legally sacrosanct.
Dmitry Marinchenko, Senior Director at Fitch Ratings.)
Well, it’s all these factors that made international investors offer much less money than the Saudi
government expected to get.
And that happened despite the company promising to distribute at least $75 billion per year
in dividends.
So it was those low ratings that forced them to play at home.
And do you know what?
Its placement in the market has been an example of how things work in these countries – badly.
The sales operation had more doping than the Tour de France!
For example, the government “recommended” that big businessmen start buying shares or
suffer the consequences;
They pressured allies such as the Emirates and Kuwait to buy billions of dollars in shares;
Banks had to give loans with extremely low-interest rates so small investors could buy shares,
And a huge advertising and telemarketing campaign were launched.
That is, the government did everything it could to make the operation a success...
Or at least to be able to say that it was.
Because in the end....
most shares stayed at home.
That is, the Saudi economy remains as dependent on oil as it was before.
And even more so, because now it isn’t just the government but also many families’ heritages
that are linked to oil.
(AUDIO: They aren’t doing what they were aiming to do, which is bring in foreign capital.
It’s not a real deal, it’s political.”
A senior banker, who asked not to be identified, speaking to the Financial Times)
The question we need to ask is: Are we looking at a downfall in Mohammed Bin Salman's plans?
In any case, what’s clear is that this attempted global sale has highlighted how things actually
work in Saudi Arabia.
Saudi Arabia is one of those countries where what the government wants is done, at all
times.
And that’s a bad mix, at least if you’re hoping to receive foreign investment.
In short, this is the story of how the Saudi Arabian government decided to begin privatizing
its most valuable assets.
Will it achieve its objectives and decrease its dependence on oil?
Would you be willing to invest your money in a company like Aramco?
Leave your answer in the comments.
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