On the Saudi Aramco IPO, what it is, its risks, valuation, flawed rationale and why the IPO of the third largest polluter in history, in the era of fighting climate change, is pure hubris and greed. Hero of the Week: Every person that went out for a climate strike worldwide, notwithstanding the deafening silence in Asia. Villain of the Week: Norway's Equinor, for lying to the British public about natural gas' "low carbon footprint" (not!) and getting caught by UK regulators
On the Saudi Aramco IPO, what it is, its risks, valuation, flawed rationale and why the IPO of the third largest polluter in history, in the era of fighting climate change, is pure hubris and greed. Hero of the Week: Every person that went out for a climate strike worldwide, notwithstanding the deafening silence in Asia. Villain of the Week: Norway's Equinor, for lying to the British public about natural gas' "low carbon footprint" (not!) and getting caught by UK regulators
[inaudible]
Speaker 2:today I'd like to spend some time talking about the Saudi Aramco IPO and why that IPO should make zero sense to investors worldwide. Welcome to episode 22 of the angry clean energy guy with me, Assad resume. I am so happy you're here. Thank you.
Speaker 1:[inaudible].
Speaker 2:So let's talk about the fact that the Saudis want to do an initial public offering for Saudi Aramco. In other words, they want to list their state owned oil company, Saudi Aramco on a stock market to share its ownership with you, the public, and do investors. They also clearly want to share the climate change risks with you, the public and you investors. Now what are they actually doing? Who is Saudi Aramco and how do we think about the Saudi Aramco IPO? And if this is such a great thing, if Saudi Aramco is such an awesome, amazing company, why would the Saudi government want to sell down its stake and send some of the profits to you, the public and you investors. And in an era where we are clearly in a climate emergency. What are JP Morgan and Goldman Sachs and Citi and HSBC and credit Swiss actually doing, promoting the stock? How can Fe, how do we reconcile their pronouncements about how they are backing the Paris climate change agreement with bringing the Saudi Aramco stock to a stock market near you? The public first, let me put the company into perspective. It's the largest oil company in the world. It's also the most profitable company in the world because in 2018 it made$110 billion of non-income and that was on revenues of$355 billion. That's as much as the GDP of Nigeria or South Africa. It's more than the GDP of Ireland or Denmark or Singapore. It's simply a huge number. Saudi Aramco is also the third biggest polluter in the history of the world after the good people of Chevron and the good people of Exxon mobile. So Aramco has pumped enough and methane into the atmosphere to qualify as the third largest polluter in history. So the Aramco IPO is simultaneously an offer of a humongously large company in terms of its current net income as well as a humongously large polluter in the age of fighting against climate change because that's the age we're in. We're in the age of fighting against climate change and here is the third polluter in history that wants your money. Now let's talk about around costs. Valuation. The crown Prince of Saudi Arabia thinks that the company should command a valuation of$2 trillion that would immediately make it more than twice as valuable as the next biggest company in the world. What the Saudis want is they want to list up to 5% of the company because they want to generate$100 billion or so for their pockets. And at the moment they are evaluating all sorts of cunning plans of how to convince you the investors worldwide to give them a a hundred billion dollars. And that could be a domestic listing in Saudi Arabia, followed by a listing in London or New York or Hong Kong or Tokyo, or it could be a listing in Saudi Arabia. And then pumping the stock up to get it to the level that they want and then a listing in London or New York or Tokyo or Hong Kong, they've got some of the smartest brains in the world working on this issue and I am sure by the time something is formally announced, it will be a very cunning plan and that's why we have to be very, very careful when we consider the Aramco IPO. Now I want to just digress and talk about greed for a minute. The company's already selected lots of banks, household names to take it public, including bank of America, Citi group, credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley, Barkley's, BNP, Perry bar, dirt share bank, UBS credit Agricole Societe Generale. You get the picture and what is hilarious is that many of these banks are the very same banks that pretend they care about climate change, but God forbid anything should come between them and making a buck. Now, so you've got all these bright bankers completely focused on the bonuses. They will take home once they take the company public because none of them actually care what the stock price does after the company goes public. And isn't that a wonderful position to be in? You've got to love it. Speaking of markets that signs on the wall aren't that bad because when the bankers look at it, what they see is that Aramco raised$12 billion this year in an international bond which had$100 billion of demand, and so they see that the collected 12 billion, but that the demand is 100 billion and they say to themselves, this IPO is going to sell greed then comes in and the attraction of getting paid a big bonus and all these lovely banks suddenly forget about environmental and social and governance criteria. They forget about climate change. They forget about the world burning. They forget even their own words. They forget their websites, they forget their CSR policies, they forget their promises and they go after a quick buck. How predictable. Now the$2 trillion that the Saudi want for the company is somewhat of a random number. Basically the Saudis took an envelope, turn that and on the back of the envelope with a very expensive pen, I would assume, calculated how much barrels of reserves they think they have and multiplied that by eight bucks,$8 and they multiplied it by$8 because that's the benchmark used to value reserves. Saudi has 260 billion barrels of reserves, or at least that's what it says. And if you multiply that by$8 you get roughly 2 trillion. And so the Saudi said we want 2 trillion. And by the way, that makes no sense whatsoever because if you applied that benchmark to Rose NAFT, the Russian company, its market cap would be multiples of what it is. And at the same time, Exxon mobile's market cap would be a fraction of what it is. So that's certainly not the only metric that's applied to derive a valuation. The$2 trillion also assumes that Saudi Aramco can pump oil until the cows come home. In other words for the next 70 years or however long the financial model of the financial analysts that will be selling that IPO to you, investors lost, which obviously is not going to happen and it's not going to happen because we have reached the end of the age of one, but let me come back to that in a second. There are other ways you can value the company. I don't want to go into the technical details, but basically these other ways do not give you$2 trillion. They'll give you somewhere between$500 billion and one point$2 trillion and now let's talk about risks. I want to start by a very funny quote from a story in the otherwise very serious financial times. It says, quote, if international demand is lower than expected, the government is expected to ask the segment of rich Saudis to make up any shortfall. Said one banker working on the deal. End of quote, let me translate that for you. In other words, if international investors do not turn out as expected at the party, then the government's going to nicely ask rich Saudis to make up the shortfall. And we know some of the techniques available to the Saudi government when it wants to ask nicely. For example, they might invite you to the Ritz Carlton hotel in Saudi Arabia or they might invite you into their consulate in Turkey. So I thought that sentence, just the way it was buried in that article was a gem. So there's risk number one, risk number two is the Paris climate agreement. If the Paris climate agreement is implemented in any shape or form, this company is not going to pump oil forever and therefore its financial model is not valid. Now the Saudis know that they will probably pump the last drop of oil on the planet, and that's because their costs of producing oil is lower than anybody else's. However, it's quantum that we're talking about. There is no way. This is how this can continue to pump oil and not just the Saudis for that matter at the level that they're pumping it at because otherwise we're all going to fry. In addition, all the sides early as they may be are that they will not pump all that oil out. Just in the last two weeks, Mercedes-Benz, which put the first internal combustion engine for a car on the market in each in 85 an ounce that it was this continuing research and development of internal combustion engines. That is the end of an era. They will focus completely on electric vehicles. Even Toyota expected to be free of traditional engines. By 2050 the electric buses are taking the road in increasing numbers. Electric cars haven't even started. Their big move and gasoline, which you put in cars and buses accounts for 25% already of oil consumed globally. Now these oil companies also seem to think that the future is plastic. In other words, they want to bury us in a lot more plastic in order to make up for any shortfall of demand from the transportation sector, but they are not going to succeed. The push against plastic is gaining momentum worldwide. Again, just in the last week, the story emerged that India is expected to announce a nationwide ban on single use plastic in October. That's India population, 1.3 billion people. India would be the 40th country or so that's actually decisively moved against single use plastic and that movement is not going back. That movement is only growing stronger yet. Another risk is that obviously when a state owned company goes public, you want a discount for the political risks that surrounded because it's controlled by government and one government needs cash. It will rate the company. Just look at the scandal of petroleo, Brazil[inaudible] for example, that sent its shares sliding to a 16 year low early last year. Investors in Russia as Roseanne NEFT as another example have to deal with sanctions that limit the stocks upside and Saudi Aramco is Saudi Arabia's ATM machine. That's what they live from. Now, counter-intuitively perhaps you would buy Saudi Aramco because it's got the lowest cost and the lowest carbon intensity or reserves in the world, which means that if you hold Exxon and shell and BP and Rosneft, you might sell your holding of those stocks and by Saudi Aramco because then the carbon intensity of your portfolio might go down. The Saudi's also making noises to encourage that switch and the noises that they're making are that they are working hard to produce the lowest cost oil with the lowest environmental impacts. Who knows? Maybe that's true. The other reason you would buy Saudi Aramco is because if it were to be listed, it will suddenly become the climate change stock. The stronger the measures we take to fight climate change, the more the stock will drop because it would be almost a direct proxy from that perspective. Now what would you pay for Saudi Aramco? You can just imagine my solitary brain cell flying around inside my head desperately trying to find another one to bank into to give me an answer. But in my case at least it's difficult to find another brain cell that would give me that answer. Instinctively though I would say you wouldn't pay much for Saudi Aramco. The risks are too high and I was talking about it as if it was in Norway, which it's not. You could see a couple of weeks ago how it's installations are vulnerable to all of not that friendly neighbors. And remember that in the 1930s the two co founders of the Saudi kingdom, Mohammed IBN Abdullah Wahab, a religious leader and even sowed a tribal leader, found common ground despite conflicting goals and built a state built on a compromise whereby the Royal family would strictly conform to alwa hubs, religious ideology by embedding it in the political structure of the kingdom. And that's relevant because this very religious ideology is not a very friendly one. It's also what Al-Qaida Dinesh, Al-Shabaab and even Nigeria is Boko Haram follow. So the country has an inherent conflict within it as well as not that friendly neighbors. It's not Norway, so there's not much to say really. In conclusion, why would you take on the headache of Saudi Aramco best to stay away from that stock and from the IPO and it's too bad if the bankers don't make the bonuses that they're counting on. I mean, why bother?
Speaker 1:[inaudible]
Speaker 2:my hero of the week is every single person that went out worldwide on a climate strike on September 20 the climate strike was remarkable on so many levels. It was the largest climate protest in history. Yes, of course. But it was one of the largest protests period in history. I do have to say however, that is the silence in Asia was somewhat definitely, if you look at the number of people that came out in China, Japan, Indonesia, Singapore, Thailand, Vietnam, Laos, Cambodia, for example, it was disproportionately low compared to the climate risk that these countries are running five of the top 10 countries, most at risk from climate change are in Asia. So I don't want to dump in the party spirits or anything, but the silence in Asia was definitely my villain of the week is Ecuador. They're always an old company, formerly known as Statway, whatever their name, they can't hide what they're actually about. They are my villain of the week because UK regulators issued a warning to them over false advertisements on the London underground that implied that gas is a low carbon energy source when we all know that the leakages from gas when you frack it or drill to get it, and then when you pick it up and transport it and refine it and pipeline, it means that it's actually dirtier than coal. Natural gas is dirtier than coal. Yet the Ecuador people ran a huge advertising campaign implying that it was a low carbon energy source and they were slapped by UK regulators who stopped them from using that advertisement. Again, Ecuador, shame on you. False advertising is absolutely terrible. You're literally trying to brainwash citizens through nice sounding campaigns that are not only false but also misleading, outright lies. Thanks again everybody for listening. Remember that you can find transcripts of every single episode within two weeks from that episode going live on my website, the angry, clean energy guy that call. Thanks so much for listening and have a great couple of weeks.
Speaker 1:[inaudible].