Saudi Aramco IPO Launches Amid Significant Concerns
Saudi Aramco is far from your average IPO, starting with it being only a very small piece of the overall company, with the Saudi government holding the rest. This is not a good bet.
Having the opportunity to invest in the world’s largest oil company might appear to be pretty tempting, but this is far from your average stock play, and perhaps as far as we could get from it. The much-anticipated launch of this IPO happened on Wednesday, which was more of a private party than something we could call a public market launch. Commentators remain standoffish about the whole event, and not without several good reasons.
A lot is being made about the overall valuation of the company based upon its IPO price and immediate run-up by 10%. The way in which the first day of trading for this stock on the Saudi operated Tadawul exchange progressed should tell us that this is no ordinary stock on no ordinary exchange, and we may even want to call this a quasi-public and not a purely public exchange, and Wednesday’s trading made this pretty clear in itself.
Saudi Aramco stock opened up at 35.20 SAR per share, and while a lot of stock changed hands throughout the day, the stock price stayed exactly there, from the Saudis putting a cap on the stock price that day. This does not resemble a free market at all actually and the fact that they can even do such a thing should have us pretty wary of investing in this.
This hasn’t really been discussed much, but it’s not hard to figure why this should alarm us. The idea with buying stock is that you may expect that increased demand and excitement will allow the price to go up and this is what we are speculating on with these trades.
When you get all this buying interest and those in power have decided that its trading price is fine just where it is, and it trades all day at that price as this stock has, this does not resemble a stock as we know them at all. We are now not only subject to the whims of the market but the whims of the government as well, who have basically gutted the working mechanisms of a stock and replaced it with a mere wave of their mighty hand.
This would not even be remotely possible with a normal exchange, but when you own both the company and the exchange, you get to make your own rules. They do have a captive market with the shares being dispersed among friends of the Saudi government, and we’re left with an insignificant float that isn’t expected to turn over much, and in case it did, its price is completely at the whim of the government.
Without looking at anything else, this should be a deal killer, as this is so distinct from normal trading that we cannot rightly call this a public offering and instead almost completely remains a private one, where a very small percentage of these private shares are being passed around to friends.
Whatever This Company is Worth Doesn’t Matter
Analysts are concerned that the value of this small float greatly overrepresents the value of the company at $1.88 trillion, but these things only really matter in a free market, and free is not a word that fits here at all. Market capitalization in itself isn’t really a meaningful number essentially anyway, and it results from a fundamental misunderstanding of thinking that the trading on the periphery represents the value of all shares held, which is actually quite ridiculous.
If we really want to figure out what the market value of all of a company’s stock is, we’d have to place all of the shares in the market and see what this would bring. Due to the way that markets work, this would flood it with massive supply and the price would crash. This is all academic as we don’t ever do such things, or would ever want to, but this does have practical consequences when we look to tax people on the value of their assets, assuming for instance that we could get the same price for our $50 billion in stock as someone just got for a few thousand dollars’ worth, which is clearly very distant from reality.
We use book value for this a lot as well, and that’s another academic exercise, because the value of a stock isn’t represented by its present value but it’s future value, and this is what stock trading captures. When we decide a stock’s future value, it is the future movement of the stock price at the periphery that is the focus, and none of this is even that well correlated with either present value or the movement of this valuation over time because it is based upon value mostly far down the road.
It should not even matter to us what the market capitalization of Saudi Aramco may be, other than this serving to clarify the ridiculousness of valuing stocks this way. It is all about where the market may take the stock price over time, and if this is not allowed to proceed normally, and is subject to limitations of price like we just saw, this is all we need to know to want to stay completely out of this crazy game, and we don’t even need to look at these other concerns as people are doing.
When you release only 1% of a company’s stock like they just did with this one, and you refuse to let the market play with even this tiny amount, the whole thing becomes a charade. Sure, the Saudis want to protect their 99% holding, and in particular, want to control the volatility of their stock price, but when you do this by decree, whatever financial success that we seek becomes fully subject to interests which may compete with ours, this is not a game that we are set up to compete in.
The Saudis don’t just control the stock, they control the company as well, and people are worried that the company not being subject to any influence from outside shareholders will represent real risk. This is true, and is especially true given that these shareholders are essentially held prisoner to the wishes of the company who do not limit their power in any way here.
This isn’t all negative, as this approach can provide stability in the face of uncertainty such as what we saw with the recent attacks on Saudi oil fields, and we saw just how volatile the market can be with what happened with the price of oil and its spiking. The same thing would happen with these company shares normally, but we can assume that the mighty hand of the Saudis would intervene, and all they have to do is to put a floor on the stock’s price to halt the decline.
The oil business is the riskiest one out there, and this applies to Saudi oil as well, but actual publicly traded oil companies do not have the magic power that the Saudis do which can be used to shape the price of this stock however they wish. Perhaps no one will trade it with this floor but who cares, the last traded price will remain if they wish.
However, having this go against us like it did on Wednesday simply removes the incentive to invest, where your share of the company’s success is too capped to be competitive with those with unrestricted opportunity, in other words, any other stock.
It Should Alarm Us to Invest in Companies Run by Dictators
If we are concerned about fundamentals with this company, we do need to be aware that the royal family siphons off profits apart from their ownership by way of royalties, on an escalating scale. Imagine a company with a private dividend that saps the profits of a company, where the more it makes, the higher this payout percentage is, profits which neither the company nor its shareholders get to enjoy.
Other oil companies pay royalties but the difference here is that they aren’t set to go up as profits do the way that Saudi Aramco is subject to, and shareholders see the value of their stock go up proportionately to the company’s success. In this situation, with the government and the company being one in the same, the primary goal becomes to benefit themselves and not share in the same way with outside owners as we normally see with stocks and companies.
Given that we can invest elsewhere, why anyone would choose such an inferior situation is difficult to imagine. They may hope that the sheer weight of the success of Saudi Aramco may result in more money being spread around to outside shareholders as well, but the company is more like a shell company for the Saudis and the ultimate goal is to extract the maximum profit for the government, the 99%, leaving us less than we otherwise would be entitled to.
They have an effective way to cordon the other 1% off by the way they manipulate royalty payments, which can be set however they choose because the royalty is the company, the government, and the exchange and calls all the shots here and answer to no one.
It’s tough enough to make good returns in this sector without this stuff, and when you see profits slashed by what amounts to escalating operating costs as they increase, this is a fabulous situation for the royal family but not a good one at all for those who wish to clutch the hem of their garments.
We’re investing in the kingdom itself when we buy Saudi Aramco stock, a kingdom that operates completely differently than any corporation would, where we are not really shareholders, we instead become vassals. You cannot own or influence a kingdom or even a piece of it.
In Western terms, this would be more akin to investing in the feudal era, where you work their land and earn enough to survive but anything beyond that is at the pleasure of the lords that you serve, who of course jealously guard their own interests and will always favor theirs over yours. Corporations can thrive in democracies but are a different animal when they are set up to serve the interests of dictators, not that this is even a real corporation.
If there ever was a stock that we may want to take a moral stance with, it would be this one. While we may complain about a lack of human rights in some countries, they simply do not have them at all here. Their rulers simply make and enforce rules as they please without limitation, including executing people for things like just speaking your mind. They have now figured out a way to take this philosophy to the world of finance, although we have no more of a way to object to what goes on with this company than if we were objecting to one of their many public beheadings.
This is not a matter of just looking the other way and just keep our eyes on the money, as this requires us to look the other way with the money side of things as well. This is not just a watered-down kingdom like we see elsewhere, this one is full strength and takes us back to the much grimmer times of antiquity more than figuratively. This one may have a modern looking face but has a will as iron and self-serving as ever. This is what we are trying to invest in with this stock, a share in a kingdom of yore, when the kings made all the rules and placed their subjects at their mercy, which now includes us.
Even if this stock was listed on the New York Stock Exchange, the hideous structure of this company from the perspective of outside shareholders makes this stock far less attractive than other oil stocks, which are themselves well below the threshold that we should be using to filter stocks. Walk away from oil stocks but run away from this one.
Editor, MarketReview.com
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