As is being widely reported, the world's biggest ever stock exchange listing is to take place soon. It is of Aramco, the Saudi oil company. With a value expected to be set at about $1.5 trillion, it will be the world's most valuable quoted company, by far. Only a tiny proportion of the stock will actually be on sale. But that's still significant: maybe $45 billion will be sold, and almost every tracker fund the world over will end up owning some of Aramco.
This matters. It matters because it's Saudi Arabia, which is, quite literally, a murderous regime.
It matters because you wonder why the Crown Prince needs this money: what's the background story, when this is still a supposedly highly profitable company. Is it not earning enough to now buy off all claims on it? And what does that say about Saudi?
And it matters because this is oil, and we all know that the world's oil reserves cannot be burned or, quite literally, there is no future for life on earth. And yet this flotation assumes we can: the value is in the reserves. Never was there a more obvious conflict between the failing logic of the market and future we need.
And this matters because, like it or not people are going to be forced to acquire these shares, whatever their personal views. That's because enforced enrolment pension funds often track markets and that means they will have no choice but own a bit of Aramco. What that means is that people's pensions will then be supposedly dependent on burning the planet they intend to live on in retirement. You can't find a greater paradox than that.
We can do without Aramco for social, political, economic, investing and environmental reasons. But the market gets what the market wants. And then people wonder why there might be anti-market sentiment? On occasion its the only rational thing to have. This is one such occasion.
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I think you’ve answered your own question about why Saudi are selling? If the movement to keep it in the ground continues to grow and value is in the reserves, then starting to sell now may be the only way to profit.
“… what’s the background story, when this is still a supposedly highly profitable company…..”
It depends who you believe.
If you believe that Saudi oil field reserves were massively overestimated, with US connivance, when Henry Kissinger set-up the Petrodollar so that the Saudis (and by extension the US) had a controlling influence on OPEC prices….. then it would be quite likely that a lot of people and institutional investors are going to be investing in shares in very expensive holes in the ground with not much oil remaining in them.
Would you buy a second hand car from these guys ?
Even on this dull November morning, what little daylight there is is twinkling. Prettily reflected in the tinfoil of my hat …..
If all the value of Aramco is in the reserves, why are those reserves being valued at $7.50 for the floatation rather than where oil prices are at the moment, around $60?
Makes me think you don’t really know what you are talking about and this is just a puff piece.
Have you heard of costs of production and the time value of money?
I thought not…..
Saudi production costs (also detailed in the Aramco float) are just under $9 a barrel.
Time value of money means the asset is worth LESS in the future than it is today – so immaterial to this argument. If anything, it hurts what you are saying. Besides, with interest rates so low, and oil futures already pricing this in, it really doesn’t make a difference to the point you are trying and failing to make.
Again, it looks like you don’t really know what you are talking about.
Because, if you did, you would know that this is not how people are pricing the company. The value is NOT in the reserves.
So where is it then?
You mean they aren’t valuing sling that oil?
What are they selling then?
“What are they selling then?”
A very large pup ?
“So where is it then?”
Given you are admitting that you don’t have a clue – it’s in the profits the company makes. Its P/E ratio is about 13 (with a valuation at $1.5trn), which is actually on the low side for global oil companies.
So no, the value is not in the oil reserves they have (or more technically have rights to). The value is in how much profit they can sell that oil for.
The amount of reserves they have (270bn barrels, or over 60 years of production at full capacity) don’t have a major impact to the value of the company – if you were valuing it on reserves alone then the company would be worth multiples of what the current valuations are.
Which rather proves that you don’t know what you are talking about here, doesn’t it.
This is actually quite funny
The value is in the profit they can make from selling the reserves but the reserves have nothing to do with the value
Of course
I hope you don’t advise anyone….
PS You really should learn a little about discounting too….it might help
I’m afraid the only thing funny here is your obvious lack of understanding. You get to the right answer – then scoff at it.
“The value is in the profit they can make from selling the reserves but the reserves have nothing to do with the value”
In a nutshell, yes. Do a little though experiment.
It cost Aramco about $17 per barrel to get it out of the ground and to the terminal.
Let’s say oil prices drop to $20. How much is the company worth now? Then let’s think how much the company would be worth if oil prices were $150. A whole lot more.
Why? because the amount of oil they have is essentially irrelevant. If they kept losing money producing it, the company would be worth zero regardless of how much oil it has. Very basic economics. It is the amount of profit they can make selling it which makes the company worth something or not.
Now of course there are caveats to that, but the value of a company is not predominantly in its assets – it is in the long term value (profit) it can produce. This is especially true in commodity producers like Aramco where the share price tends to be highly linked to the price of the commodity produced.
But of course, if you were right (which you aren’t), as I have already pointed out a couple of times, Aramco would be worth a lot more than $1.5trn, because the assets it has (oil) are worth a lot more – even discounted.
Talking about discounting, I’m pretty sure you don’t really know what that means. I’m even more sure you wouldn’t be able to work out the discount on a future cash flow. But as I also said, with yields so low out to 30 years and real yields essentially zero, we don’t have to discount much at all in this case.
Which rather leaves your whole argument in tatters, doesn’t it?
But I’m sure, being as confident (arrogant) as you are, and despite not being an expert or indeed having any experience in this field, you can tell me how much Aramco should be worth. After all – you seem to know more than the rest of the world does. Why not share it with us?
Hmmm…I’m a professor of political economy and don’t know about discounting
It’s an interesting idea, I guess
And a chartered accountant who does not know that value is the discounted worth of future cash flows, all of which will come from selling oil in this case
Nigel, stop making a fool of yourself. This company’s value is based on exploiting its reserves. It has nothing else.
Now stop wasting my time.
and how much should Aramco be worth? A lot less: that oil needs to stay in the ground
“Hmmm…I’m a professor of political economy and don’t know about discounting”
Well, you are a Professor of practice, not a professor. And I am pretty sure you are able to look up a definition of discounting on google, but am also pretty sure you are unable to actually perform the mathematical action of discounting a future cash flow. If you could, you would easily be able to estimate what Aramco is worth based on it’s reserves alone.
“Nigel, stop making a fool of yourself. This company’s value is based on exploiting its reserves. It has nothing else.”
I would suggest you do the same. It is very clear you don’t understand what you are talking about – if you did the company would be worth a lot more – according to your claims that it’s value is based on the size of it’s reserves. The very fact that this isn’t the case proves you wrong. That you are now saying “exploiting” is I am sure an indication of you trying to wiggle out of that issue.
But OK, let’s play it your way for a minute. You seem to think a company should be valued by it’s assets, not it’s profits. In that case, what assets do TRUK and the Fair Tax Mark have, and how much are they worth?
I’m guessing they don’t have many assets, so not worth much. Essentially zero, in fact. Is that the case?
Nigel
Professors of practice are professors
And they’re appointed because they actually know how things work
They don’t dance on pinheads, unlike you
You’re just time-wasting here – and your argument is glaringly obviously fatuous so you’re now going on the troll list
And as for your question – the answer is, I have no doubt ‘nothing’, excepting their assets. So? You can’t even get that right
Richard
“What do you want for your future?” – well what i want is immaterial when the discussion relates to the valuation placed on Aramco. Opinions about what one wants and what happens in the real world are two different things. In this discussion your preference that Aramco’s reserves stay in the ground thereby rendering the company worthless does not relate to what is going to happen. Sure you can try and change the direction and that is mighty noble but it doesn’t change how the world is viewing Aramco and that the valuation placed on the company probably makes them an attractive investment for those with investing in international equities.
I can assure you that what you want and what happens are not independent variables
It’s the feeling that they are that is letting some so wildly misvalue Aramco
The IEA estimates that global energy demand will increase 40% by 2035, based on projections that the global middle class will more than double to 5 billion by then. In order to meet that demand, it is considered that All forms of energy will need to be in play to the full extent possible.
With respect to the immediate issue of Aramco and prices, there is some background noise that a deliberate withdrawal of crude oil from the markets, in order to influence prices, is in the works. (One assumes OPEC and Saudi are the possible subject of this talk.) If so, that would influence the character of the IPO, one has to conclude.
That’s in ‘interesting’ suggestion bu the IEA, only reconcilable with the end of life on earth.
With Ameco the reserves are so vast for the valuation of the stock they considered a near perpetuity. Saudi costs of extraction are often a fraction of the rest of the world so in simple terms the oil price dictates profitability. If the oil price falls then those companies with more costly extraction will cease production and Ameco’s market share goes up thereby maintaining revenues. At the float valuation the shares look cheap so will probably go to a decent premium when trading begins.
Of course if you believe oil production should cease immediately and all reserves should remain in the ground then indeed the Shares are worthless. As a professor of political economy you can probably see that this is not how the world is going function tomorrow, in a years time or in the foreseeable future. Technological advancement holds the key not an immediate and drastic change in the consumption patterns of China, America, India, Russia, Asia etc.
As a person engaged in climate change and sustainability I know that unless we drastically cut the burning of oil there is no future political economy, or anything else
What do you want for your future?
Neil says:
“With respect to the immediate issue of Aramco and prices, there is some background noise that a deliberate withdrawal of crude oil from the markets, in order to influence prices, is in the works. ”
In the works ??
Lol.
What else do you think has been the principle objective of US foreign policy for half a century ? This has been a manipulated market and will continue to be.
You don’t seem to view this in other than financial market terms, which presumably is the extent of your interest. Investors and speculators buying into Aramco are entirely at the mercy of the US. (Assuming the estimates of Saudi reserves are approaching accurate) If you can correctly guess US long term policy intentions you’ll be safe(ish).
Ladies and gentlemen; place your bets.
I think the responses miss the point, which is, that I was not really making a point. It was information. I also detect that Richard realises that he IEA is not simply trying to intervene in the interests of the petrodollar: their projections are not unique.
Yes, I agree that everyone tries (and to some degree succeeds) in manipulating key markets – like oil (and energy in general). The energy sector is all about power. (And the word play is intentional there.) The substance of what I was pointing to was that there might be a short term manipulation of the oil market related to the IPO, and that in this instance, it is not the US intervening. Don’t kill the messenger.
The extent of my interest is in how we live together as people. So, pretty much everything. Do take care with imputations of character. Ad hominem stuff doesn’t wash with me. (Though it can produce some witty moments.)
Richard,
If you are so confident that the value/share price of Aramco is wrong, would you be willing to make a bet on it?
I’m a Quaker
I don’t bet