# Saudi Aramco - A good investment or not?



## SirRumpole (4 November 2019)

The world's most profitable company is going public.

Aramco, the Saudi oil company will be offering shares to the public for the first time.

Given it's profitability it would seem a good investment, but also given that times are changing and the world is looking more to non fossil fuels over time the value of the company may decline.

What do the investors here think ?

https://www.abc.net.au/news/2019-11...ompany-aramco-to-go-partially-public/11667858


----------



## qldfrog (4 November 2019)

Aramco
One of the best well kept secret is what are the reserves?
I doubt anyone has any clue
So valuing Aramco is a guess game, and that is before any consideration of energy change trends


----------



## Joe Blow (4 November 2019)

Moving this thread to the International Markets forum.


----------



## Smurf1976 (5 November 2019)

My first thought is that this is one of the few opportunities to invest in a business which heads up a cartel.

It's also unusual in that the main "shareholder" is a foreign government for whom it represents their largest source of revenue.

It's also one of not too many companies whose assets are of themselves a potential military target. There's plenty of companies that could foreseeably be caught up in a war or whose products could be used for that purpose but not many who are themselves a plausible target. 

I haven't given it a huge amount of thought beyond noting those unusual aspects of the company.

As for the reserves - well pretty much anyone with any serious interest in energy will have had a go at trying to work that one out at some point. 

The great trouble is that there's no way to know if you've got it right or not. There's probably been more attempts to work out Saudi's oil reserves than any other resource on the planet but crux of it is that so long as the oil keeps flowing they must have some and that's about all you can be sure of.

So you can either take their word for it or join the many thousands who've come up with some seemingly plausible basis of estimating it - all of which end up being a purely "desktop" exercise conducted in an office somewhere and without any ability to verify the results.

What can be said though is that they've been shifting their own energy consumption away from oil and toward other fuels, particularly gas, quite strongly in recent years. Whether that is related to oil reserves or is a purely financial or even environmental decision is anyone's guess really.


----------



## SirRumpole (5 November 2019)

I suppose you could also ask why offer shares at all if the profits are so great why not just keep them ?

Maybe its an attempt to offload some assets at a high price before they start to depreciate.


----------



## macca (5 November 2019)

I cannot but help wondering ............. Why Now?

If I owned a successful business like this why share it ?

No one knows their reserves (except them), no one is more aware of the shift to renewables, no one is more aware of the potential for more attacks, is Iran about to go feral and block the Strait............................

I have read that the Royal family expenditure is unbelievable, perhaps they all want a new Roller this year.


----------



## Jack Aubrey (5 November 2019)

SirRumpole said:


> I suppose you could also ask why offer shares at all if the profits are so great why not just keep them ?
> 
> Maybe its an attempt to offload some assets at a high price before they start to depreciate.



I have seen that theory put forward in "The Economist" (paywalled).  Some see it as way of offloading potentially "stranded assets" as oil use/price declines.  I think Exxon is also packaging up some of its assets for sale (Bass Strait rigs among them).  That's not to say some profits won't be made by traders.


----------



## SirRumpole (5 November 2019)

Jack Aubrey said:


> I have seen that theory put forward in "The Economist" (paywalled).  Some see it as way of offloading potentially "stranded assets" as oil use/price declines.  I think Exxon is also packaging up some of its assets for sale (Bass Strait rigs among them).  That's not to say some profits won't be made by traders.




Probably best to stay away from the IPO at the start, see how it settles then trade it as just another oil company.


----------



## Smurf1976 (5 November 2019)

SirRumpole said:


> Maybe its an attempt to offload some assets at a high price before they start to depreciate.




I also ponder the political dimensions of the decision.

I’m thinking in terms of Saudi embracing Western capitalism and all that - can’t really send a stronger message on that one than floating their national oil company albeit only part of it.

That they’re going to allow tourists to visit the country is another action worth noting - until now they’ve been one of the very few places that’s basically off limits to most people.


----------



## Smurf1976 (5 November 2019)

SirRumpole said:


> Probably best to stay away from the IPO at the start, see how it settles then trade it as just another oil company.



Where there could be an opportunity is that logically they’d want the oil price high for the float and unlike most commodity producers they do have some ability to influence that price via OPEC.

Buying oil now, not Aramco when it floats, could be a viable trade?


----------



## john5 (5 November 2019)

perhaps it represents a modernising of their country, opening up, in a similar way to eastern european or asian emerging markets in the past, it could be the first of many other companies to come maybe


----------



## ducati916 (8 November 2019)

The chatter is now about 'Peak Oil _Demand_'.

Some 20+ countries rely on exporting oil as their major source of revenue as measured by GDP (18%+). Thus the most expensive (producers) with the dirtiest oil, if POO stays low (or falls lower) could be out of business with all the social and political ramifications that that will create.

If demand does (or is) shrinking, there are going to be bankruptcies. This is already (potentially) starting: 
_*
Chesapeake warned that it might be forced out of business. *_Shale gas giant *Chesapeake Energy (NYSE: CHK)* warned that it might not stay in business of oil and natural gas prices remain depressed. On Tuesday, Chesapeake said there is “substantial doubt” about its ability to continue as a going concern if prices don’t rise. 

I'm sure there are plenty others on the verge.

Of course, demand (if it does actually fall) will not simply fall overnight, it will take time. 

Which means, if falling demand (due to leverage) has an exponential non-linear response vis-a-vis producers, supply could fall far more quickly if the marginal producer (Aramco) and others, take time in replacing supply...which could produce price spikes in the markets.

jog on
duc


----------



## Sdajii (9 November 2019)

I can't help but wonder if their reserves are finally running low or if they are convinced oil prices are going to fall. The obvious question to anyone thinking about this is 'If it's such a good thing economically, why sell it?'

If their reserves are running low, it's obviously worrying for the company, but possibly a sign of a boom for oil in the medium term. If they're just reading the market, and presumably they know better than anyone, then some time in the near future will be a good time to run far away from oil.


----------



## sptrawler (9 November 2019)

My guess is the World is going to move toward sustainable energy, that means the reliance on finite resources is going to contract.
The faster the return on investment increases for renewables, the faster the return on investment for oil decreases, so it becomes a financial decision.
It is a bit like sitting on a 1000 acre farm above a coal deposit, 20 years ago it was worth $hit loads, today?


----------



## ducati916 (9 November 2019)

Oil accounts for 33%+/- of the world's energy use. That is +/- 95M barrels/day. For an effect (estimated) in reducing global warming, this must drop to +/- 45M-70M barrels/day. Governments have proven 100% ineffectual to date in reducing emissions. How will that change?

The US (still) has 40%+/- energy from oil. How will that use be curtailed anytime soon?

Shale based projects and a number of other expensive projects that were initiated when POO was $100/barrel are going to lose a lot of money. New capital will not be invested at current POO. This will see a fall (most likely) in supply, thus the possibility of a price spike or on average higher prices, which favour low cost producers. ARAMCO is right up there with the lowest cost producers.

Petrol based cars use +/- 33M barrels/day. Replacing them with electric cars will take how long? Even in wealthy countries, the sheer number of cars to be replaced will take time.

Assuming that global economic growth continues (and all governments pursue economic growth with all the options at their disposal) will likely see oil continue in lockstep for quite some time.

Does that make ARAMCO a good investment?

That question would really depend on the IPO valuation. A $1.5T-$2T valuation is probably rich. If there is a dip in the price after listing, then maybe.

The 'product' is (as argued) likely to be in demand for some time. The risk being, that it is located in one of the most turbulent regions on the planet. It has survived and thrived for the best part of 100 years so the probabilities favour continued survival, but, then again, it could be the turkey problem.

Would I invest in it? No. I would forego the dividend and simply invest in oil itself (which I have).

jog on
duc


----------



## qldfrog (9 November 2019)

sptrawler said:


> My guess is the World is going to move toward sustainable energy, that means the reliance on finite resources is going to contract.
> It is a bit like sitting on a 1000 acre farm above a coal deposit, 20 years ago it was worth $hit loads, today?



Was worth a lot in the US, in Australia, the miner would just ask the farmer to f.u with the government backing..unless i think 
in .WA...


----------



## qldfrog (9 November 2019)

Fully agree we will burn oil for quite a while, i even doubt we will actually reduce usage as long as the resource is plentiful
But i  would not invest a cent in that offering, no reason to offload good assets so must be a dud


----------



## qldfrog (9 November 2019)

Should specify
We as human, the west will be waging war on carbon but not the remaining 80pc of the world


----------



## Jack Aubrey (9 November 2019)

qldfrog said:


> Fully agree we will burn oil for quite a while, i even doubt we will actually reduce usage as long as the resource is plentiful
> But i  would not invest a cent in that offering, no reason to offload good assets so must be a dud




I'd give oil 10 years as a major fuel source in the west - not that consumption will fall to zero.  Coal has maybe 20 years IMO.  As for the non-Western usage, here's a graph of China's CO2 emissions from Ross Garnaut's latest book. 
	

		
			
		

		
	







Actual emissions are lower than any previous projection.  The reasons are complicated but point to a genuine change in the way energy is being sourced and used - and to China's growth slowing from the stratospheric highs of 10 years ago.  If India is doing something similar (probably lagging by about five years), the prospects for an economic recovery based on oil and coal will evaporate (especially for Australia).  I believe that China's transport will move very quickly to zero emissions and that other fossil fuels will be subject to aggressive import replacement policies (Disclosure: I have a small holding in a company ASX:EXR, involved in opening up Mongolian CSG resources).  China uses markets to drive change, it doesn't wait for markets to deliver.

I do agree with the above comments about the valuation of ARAMCO - it has taken three years to arrive at the USD1.5B valuation after initially suggesting USD3B.  The ownership structure, especially the continuing control by the House of Saud, make it all a bit too opaque for me.


----------



## qldfrog (9 November 2019)

Hi Jack,
Put a calendar reminder in 5y to see if oil consumption is lower than current in China, in India, overall

Believe me 
, China does not give a s,,,t about carbon emissions, and they are probably right, but they care about pollution and air quality..for obvious reasons...
Oil is good in term of pollution vs coal so maybe more oil less coal is my opinion


----------



## Smurf1976 (9 November 2019)

On the subject of reserves, the most obvious issue is that official published reserves are implausible.

I state that as fact for the very simple reason that the never go down. Now whilst it's certainly possible that over x years they discover more than they've extracted in that time, it's incredibly unlikely that literally every single year sees discovery match or exceed production. _Exactly_ matching it, as happens frequently in all the OPEC members, really stretches the bounds of credibility.

Or in simpler terms, it's a bit like someone telling you they earn _exactly_ the average wage and each year it goes up by _exactly_ the average increase. They also have exactly the average height, weight and use the average amount of water down to the litre. At some point all that precision and being right bang on the expected results becomes suspicious to say the least and especially so when you've done it for decades.

So we don't know for sure and can only make guesses based on observed actions.

If they can pump 12.5 million barrels per day then realistically they've got at least 75 billion barrels of recoverable oil in the ground. That's just applying the minimum reserves to production ratio that most countries with comparably graded oil can achieve and assuming the Saudi's don't have any magic there. 

Note in that context that oil seeps through porous rock, it's not some great big lake underground with a straw stuck into it, it's more like draining a sponge. Slowly and steady - trying to go too fast causes all sorts of technical problems and tends to end rather badly.

So their reserves are somewhere upwards of 75 billion barrels that seems almost certain.

Another thing we can observe is that they don't aim to maximise volume since they are openly aiming to hold prices up. As such, in a hypothetical scenario of unlimited resources, the cost of oil for use within Saudi Arabia is the cost of producing it, not the market price, since they'll just set exports at the desired level and then adjust production according to exports + local consumption.

That's the same as a lot of things. Sand for example might cost a fair bit on a building site in Sydney but it's almost free if you're in the middle of nowhere with an effectively unlimited resource and stuff all cost of transport. Same in any situation where the resource greatly exceeds what you're willing or able to sell to the market.

Which brings up the point that the Saudi's are shifting heavily toward gas for their own energy needs. What this tells me is that either:

*Their oil production costs at the margin now exceed the cost of producing gas and building gas infrastructure. If so then that is an indication that whilst they may have plenty of oil, they don't have an abundance of oil that's very cheap to produce. Cost going up is the first concrete sign of an impending peak in any oil producing region.

*They are in fact concerned about reserves versus future export potential and are thus assigning market value to oil produced for their own consumption.

*Environmental reasons etc.

Assuming they haven't gone "green", and they're not known for being of that view generally, then it's going to be one of the first two reasons. They've concluded that either total reserves are somewhat limited relative to future consumption or costs for oil production are increasing as lesser quality / harder to develop fields are needed to keep production up. 

Now another point is that Aramco have themselves said that Ghawar, their and the world's largest oil field, has a present capacity of 3.8 million barrels per day. Sounds impressive until you realise that it used to be over 5 million - there's the smoking gun if anyone's looking for it.

Their and the world's largest field has peaked, at least their recently released data says it has, which leaves the debate as being about the rest in terms of reserves, flow rate and cost.

That doesn't tell us what their reserves are but it's a bit like not knowing someone's age but you do know that their hair is starting to go grey and they've got a few wrinkles appearing. It doesn't tell you that they're about to drop dead but it does tell you they're not young anymore. Much the same with Saudi oil really.


----------

