The Risks of Aramco’s Record-Setting IPO, Explained | WSJ

The Risks of Aramco’s Record-Setting IPO, Explained | WSJ


– [Narrator] So, you’re an investor, you’re looking for
places to put your money, and you keep hearing about what could be the biggest IPO of all time. Saudi Aramco. – [Man] The world’s
biggest share offering. – [Woman] The biggest IPO in history. – [Narrator] To be clear,
the share sale is happening on the local stock exchange, the Tadawul, and it’s mostly aimed at Saudi Arabians. – It’s on ATMs, it’s on billboards. The state-owned newspapers
are advertising it. Banks are offering loans for people to buy shares in Aramco. – [Narrator] Aramco isn’t
just any old company. It’s the most profitable one in the world. Its desired valuation,
even on the low end, dwarfs corporate giants
like Apple or Amazon. But its road to going public
has been long and complicated. – Taking the world’s most
profitable company to market has not been an easy job. – It’s all about the valuation. – After years of delay and
amid new security threats posed by rival Iran. – Saudi Aramco announcing plans of course to list on the Tadawul. – [Narrator] So, is Aramco
a good bet for investors? There are a few things
you need to consider. First is how Aramco makes money. Simply put, oil. And that’s great when
oil markets are strong, but going all in on one
asset, in this case oil, means you’re exposed to its value. And that value changes a lot. In 2018, Aramco turned a bigger profit than any other company. Still, the company’s
third-quarter net income this year was down 30% from the same time last year. That’s in part because
of lower oil prices. With all of the uncertainty
around the price of oil, it’s hard to tell if Aramco can grow. And experts can’t even agree on how much the company is actually worth. A very basic way to look at Aramco’s value is based on how much oil
Saudi Arabia has underground. In 2018, the kingdom controlled nearly 18% of the world’s reserves. If Aramco could make a roughly $8 profit on each of those barrels, that would give it a
$2 trillion valuation. But Aramco’s latest price target falls $300-$400 billion
short of the $2 valuation the Crown Prince was aiming for. That lower price target
acknowledges some risks Aramco’s business faces, like tensions in the Middle East, the price of renewable energy, and demand for electric cars. And Aramco’s prospectus
acknowledges that climate change could have a negative
impact on its business. The energy market is changing, and Aramco may have to change too. In 2018, roughly 34% of the world’s energy was fueled by oil, but there’s only so
much oil to be drilled, and the market for renewable
energy is on the rise. The share of renewables in
global energy consumption is expected to grow from
4% today to 15% by 2040. The oil industry has been under pressure from regulators and
politicians around the world to help develop cleaner
alternatives to fossil fuels. – So a lot of the oil majors globally have been making investments
in the last couple of years into new energy businesses. And these can be wind farms, it can be electric
vehicle charging stations. But at this stage we’re not
seeing any big moves by Aramco into renewable energy. – [Narrator] While Aramco itself isn’t investing much in renewable energy, the country of Saudi Arabia wants to. The Crown Prince plans
to use some of the money raised from Aramco’s IPO to make his country less reliant on oil by investing in things like technology, tourism, wind, and solar power. He can do that because the Saudi Kingdom technically owns Aramco, and the Crown Prince can potentially do what he wants with the company, as long as the government controls it. That’s another big
question among investors. Even after an IPO, it might be hard to know exactly where the Saudi government
starts and Aramco ends. Just look at Aramco’s board. Six of the 11 members have
current or former ties to the Saudi government, and the government’s priorities are baked into Aramco’s business plan. Its prospectus even says Aramco might do things for the Saudi Kingdom even if it doesn’t make
the most sense financially. – The Saudi Kingdom is
the shareholder of Aramco, so it has absolutely
been in the driving seat of whether or not this IPO goes ahead. And that has been one of the reasons that the IPO has been repeatedly delayed since it was first announced in 2016. The other issue is ESG, environmental social governance issues. These have been things that investors have been growing
increasingly concerned about, and there’s definitely some
issues around that for Aramco, around environment, around human rights. – [Narrator] In 2018, Jamal Khashoggi, a journalist who was critical of the Saudi Kingdom’s leadership, was murdered by Saudi operatives. While the United Nations and CIA have implicated the Crown Prince in the ordering of the murder, the kingdom has denied his role. After the murder, some investors publicly distanced
themselves from the country by dropping out of a big
Saudi business conference. Now the Saudi government’s
role in Aramco’s future is unclear. Aramco is only putting a small
percentage of its business up for sale, so the kingdom will still
own most of the company after the IPO. That doesn’t just present an
ethical dilemma for investors. It raises tangible security concerns too, since Aramco could be a target for countries at odds with Saudi Arabia. Just think back to September, when a drone attack briefly wiped out half of Aramco’s oil production. Saudi Arabia blamed
Iran for the airstrikes, but Iran has denied its involvement. The cost of recovering from
these September attacks were part of the reason
Aramco’s net profits for Q3 were down 30% from last year. And Aramco’s prospectus said
terrorism and armed conflict could have a significant
impact on its business. While it took less than
a month for the company to return to its original
production output, the attacks showed investors
that Aramco is facing some pretty serious security risks. Even being the world’s largest or the world’s most profitable company doesn’t mean it will
necessarily be successful after it goes public, and the IPO isn’t expected to be the big global offering it
was initially pitched as. After pressure built up
from international investors to disclose more information
about its business, Aramco decided to gear the IPO mainly towards Saudi investors. Aramco declined to comment on a story about its IPO obstacles, and the Saudi government said the IPO has gone “according to plan from day one.” – So is Aramco a good bet? Well, they are guaranteeing a dividend. But on the flip side, it is hard to see what the story for this
company will be in future as we move through the energy transition, away from fossil fuels and
into more new energies. (gentle music)

100 thoughts on “The Risks of Aramco’s Record-Setting IPO, Explained | WSJ

  1. not enough meat on the bone for investors & that country is corrupt and vulnerable high risk for such a small reward.

  2. There's literally no guarantee the Saudi royal family won't just nationalize Aramco again when they need extra cash. Just imagine an oil glut or a war with Iran, both of which are almost an inevitability within the near term.

  3. Dont think renewable energy will completely eclipse the fossil's in any given future. What concerns is that how much its oil reserve is still holding underground, and geo-political risk in that region and its Royal family power struggles.

  4. Why IPO If you are sitting in tons of cash/oil? Why share the profits with an IPO If you can cash It ALL alone? This IPO is a huge fraud.

  5. Too bad they ain't listed on the western exchanges.. Would have really loved to short the heck out of them.. They deserve to die..

  6. I think I'll pass on doing business with the terrorist state that attacked us on 911. No doubt there are lots of people (they are called republicans) that will jump on any chance to destroy America.

  7. You could of course also put your money in copper phone cables, in horse or ox carts, whips, VHS tapes and recorders or in a Trabant factory. Most obsolete products and technologies will be worth more in 20 years than oil. The wait is for the unavoidable disasters that will break the camels back.

  8. Will Aramco be diversifying, or will it only be the Saudi kingdom? Once would make Aramco a excellent investment for the next century. The other would only make the prince and Saudi Arabia wealthy while it's investors are left picking up the pieces.

  9. The way I see it. Oil is already done. Some people just don't realize it yet, likely because imaging drastic change can be hard. The move away from oil is only going to accelerate. The climate is already changing, the importance of this issue is only going to rise.

  10. Direct wealth transfer to the Saudi Royal family is not my idea of a good investment. That is just me personally. Maybe once they have a decade of track record in playing well in the market and if they have a decent (rising) dividend…then it might be a good investment. Show me, don't sell me. Chevron/Exxon/Shell/Total are better investments in the oil patch imo.

  11. That compnay is already trillion dollar company so why thai company needs to go for IPO . I just want commnets on this topic

  12. Whatever impact your were trying to do through this video which is full of false information, I glad and proud to tell that Aramco has successfully covered the IPO

  13. WSJ is saying in other words ,dont invest in Saudi aramco because there are other american companies .Why invest in Aramco when there is an American dream that has to be fulfilled 🙂

  14. I can't wait to take a short posiition. I've been pounding USA oil flat all year long. It doesn't take much to put a dent In big oils profits.

  15. Saudi is diversifying from oil, Which means ARAMCO could be pushed in the direction. Ethically speaking, that is the right thing. And given that the company is under direct control of the Saudi government, pushing the Company to diversify its resource into renewable like they did with Gas is very likely.

  16. Smart move from Saudi Arabia.
    Because they know very well that they can “nationalize” Aramco again in the future.
    So they can just grab back all the assets
    I wouldnt put my money in this company. Its too concentrated in Saudi Arabia and can easily be nationalized again.

  17. (H)Aramco is not the most profitable company in the world, it's net profit as a percentage of its turnover is sub standard.

  18. SAUDI ARABIA IS A VERY UNSTABLE COUNTRY AND VERY RISKY FOR INVESTMENT…..THE SAUDIS HAVE CREATED MANY ENEMIES DUE TO ITS SUPPORT FOR TERRORISTS,,,,THAT MAKES IT A TARGET FOR FUTURE ATTACKS …..ITS OIL FACILITIES ARE THE BEST TARGETS TO SHUT THE COUNTRY DOWN/….

  19. Oil ain't going to last forever. Remember all big things will fail, Rome 🤔 . Someone else will come and do it better. Elon musk 😎

  20. lol, Aramco going IPO is like the next ponzi scheme. With the advent of climate change, investing in O&G is just throwing money away on an industry going out the door. This is just a cash grab, hence aiming for a $2T valuation. Shoot the moon while you still can Sauds, it's all you got.

  21. Aramco after IPO will essentially be state-owned enterprise without the state having any risk in the enterprise. Anybody who buys shares in this is essentially giving their money to Saudi government with nothing in return beside vague promises.

  22. Wall street may be full of comission seeking thieves, but I'd rather trust the SEC rather than some Saudi regulators and exchanges.

  23. I think the Saudis are smart enough to know that the future of oil will not be viable in 50 Years. They can slowly pull back and shift away. China has shifted to all electric and once North America does within 25 years, then it’ll be nothing but the slow race to the bottom.

  24. i love how the wall street journal likes to imply stocks are the same as slot machines. A company that has billions in revenues of real dollars, and supplies countries with one of the main factors that causes their GDP to increase(fuel), is not a slot machine.

  25. 1. Why wont they show their oil reserves data?
    2. Why sell ANY of your mature company in a mature industry? They need cash BAD…and thats its.

  26. Aramco is moving heavily into petrochemicals as well. That’s an entirely different market than oil and creates diversification

  27. Meh you guys kinda painted it as shady which isn't true tbh they do have security & symbloic & sovereignty concerns that justify them keeping a majority share holder, the country isn't open but its opening personally i bought some share because they were open to non saudi aswell regretting not buying more 😢

  28. A quick review of the comments, made me realise why the poor stay poor and rich become richer, the highest and most profitable company in the whole world for half a century and they are talking about the geopolitical issues like they where in that region for about a week!

  29. electric car would collapsing saud regime

    coal to electricity
    natural gas to electricity
    sollar to electricity
    wind to electricity
    fusion to electricity

  30. كلام غير صحيح لأن الاقصاد العالمي يعتمد على النفط الي الآن لايمكنك للإقتصاد العالمي أن يعتمد على الطاقة المتجددة

  31. I just pulled a loan on my 1.2 million dollar house, I'm going all in. pulling out before 3.8.20 and will make 23% on my investment ✊💰

  32. Oil is the new Coal and Electric is the new Oil. They want investors to buy oil company shares so they can invest in renewables. Looks like a great investment 😉

  33. Any individual who has an ounce of moral fibre,
    a principled backbone
    will NOT
    support a
    Regime which has an
    horrendous history of
    Human Rights Violations !

  34. One suggestion
    I have been following this news since quite a while
    Can we all focus on WHY exactly does Aramco need an IPO ?
    It generates enough free cash to feed nations
    It's important to focus on the real reason behind this offer

  35. Short term profits, but EV cars are about to wreck its stock prices in the near future as well as america and the world becoming more green.

  36. What does Saudi Arabia produce in terms of intellect-based assets? Hmmm…. I'd have to think a while there.
    I suspect the Saudis have finally realized that their chief asset isn't going to endure much longer and will rendered toxic by renewables over the coming decades. They're cashing in while the going is still good to finance their unearned lavish lifestyles and to create a financial nest egg for when they'll have to use their intellectual skills to get by. Beware…long-term investors, you're being exploited.

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