Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Saudi Aramco Oil Sale? I Won’t Buy It

Commodities / Oil Companies May 11, 2016 - 12:12 PM GMT

By: Rodney_Johnson

Commodities Saudi Arabia has a problem. The country’s wealth is completely dependent on oil revenue, which state officials use to bribe the population into submission.

But with the price of oil hovering in the mid-$40s, after falling from over $100 in recent years, the Saudis have been dipping into their national piggy bank to make good on their social promises.


They need oil prices over $60 to balance their budget, but that might not be in the cards anytime soon. Looking at a future full of American fracking, country officials decided they needed to change course.

So, they came up with a plan.

To break the country’s dependence on oil, it will invest in other technologies and industries, retraining its working population and setting the country on a course for the 21st century.

To finance this transition, the government will sell shares in its national oil company to the public. Most likely, it’ll list shares on the national stock exchange and another in a major hub like New York or London.

When shares of the oil company, Aramco, hit the market, it could cause a feeding frenzy.

A word of advice – don’t take a bite.

Aramco could be valued between $2 trillion and $3 trillion. The Saudis are talking about selling perhaps 5% of the company, which would raise between $100 billion and $150 billion.

For their investment, shareholders would get no control, no visibility, no assurance that company officials would work on their behalf, and a history full of self-interested dealings that are meant to benefit Saudis and no one else.

Thanks, but no thanks.

For those not versed in the history of Middle Eastern oil exploration, ARAMCO stands for Arabian American Oil Company. I won’t bore you with all the background details, but a few milestones are noteworthy.

In 1933, Saudi Arabia sold a concession to Standard Oil allowing the company to explore for oil. It took five years, but eventually they found it, and started paying the Saudis a set fee per unit of oil produced.

During the 1940s, other oil companies joined the group, and several major oil fields were found.

Saudi Arabia decided it wasn’t getting paid enough after western energy companies started cutting deals with other countries in the area, like Iran. So, in 1950, Saudi officials persuaded Aramco to split the profits 50/50 between the western firms and the Saudi government. By “persuaded,” they threatened to nationalize the company’s assets. Some deal.

Production continued during the 1950s and 1960s. OPEC formed in 1968 as several oil-producing countries came together after geopolitical tensions bled into their oil operations. By 1973, the Saudi government was again dissatisfied with its profit-sharing. Now, they wanted ownership.

The government again “persuaded” the companies of Aramco to sell 25% to the Saudi government. The share was increased to 60% after the 1973 Israeli Middle East War, and then pushed to 100% by the mid-1970s.

Now, the Saudi government didn’t just take the company. They paid for the shares, which in 1973 terms came to about $2.7 billion. That equates to roughly $15 billion today.

Of course, at the time, the proven oil reserves in Saudi Arabia were just 93 billion. Today they have 260 billion, so Aramco should be worth a lot more.

But how much more? If the company controls three times the amount of reserves, shouldn’t today’s value be three times what they paid, or $45 billion?

Hmmm. Something doesn’t add up.

If the company is worth $2.5 trillion today as Saudi Arabia claims, then it should have been worth a third of that, adjusted lower for inflation, in 1973, given the difference in proven oil reserves. That would put the fair value back then at $155 billion. And yet the Saudis paid just $2.7 billion by threatening nationalization. That’s a heck of a negotiation strategy!

Fast forward to the present, when the country hopes to end its reliance on oil in its national economy.  Granted, this will be exceptionally difficult, given that the Saudis produce little other than oil and sand.

But that’s their goal. And to do it, they want to raise money from private investors, who will end up owning part of the very oil company that the government is trying to de-emphasize.

If the Saudis aren’t successful, and oil remains by far the largest contributor to the economy, what happens to shareholders if oil prices are stuck at low levels?

Do they get anything? Dividends? Anything? I can’t see the Saudis joyfully shipping money out of the country when they are bleeding cash.

And if the Saudis are able to end their reliance on oil, then what? Will they keep investing in new technology and exploration to keep Aramco growing? Or will private investors find themselves holding onto an asset in long-term decline?

Given their history, as well as their goals, this looks like an investment that no one could love.

When it hits the market, expect share prices to move with the price of oil for a little while. But when shareholders find themselves unable to get straight answers from Aramco officials, and then see the kingdom siphon off assets for other projects, chances are these shares will be relegated to an unloved corner of the market.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in