Gotta let it Burn! ARAMCO IPO! Oil Thoughts! And everything else!

Water Cooler Investing
#1

So Aramco plans to ipo 5% of the company at a 1.5 to 2 trillion valuation in 2019! Is this fair?

just the facts:

they produce oil at 10 bucks a barrel. the average cost worldwide is about 50 bucks. they are the lowest cost producer.

they pump about 10 million barrels per day. so about 3.65 billon per year! they are the highest producer in terms of volume. (equivalent to russia)

when prices were 50 bucks, they made $35b in profit in first half of 2017, so annualized thats about $70b.

prices today are currently at 70 bucks. i would say that’s an additional $50b in profit after accounting for 20% royalty! so a total of $120b for 2018. they plan to spend about 400b in capex for 10 years implying 40b in capex per year. so fcf of 80b/year at current prices.

a 10x to 30x multiple could give it a range between: $800b to $2.4b. Exxon atm is currently trading at 25x multiple! i would argue that aramco deserves a higher multiple since they are the most likely to survive a price crash.

as the lowest cost and high volume producer. they can lower the price of oil, but the issue is that they will be less profitable. if they are only giving 5% skin to everyone, it implies that they still want to be as profitable as possible! the issue is if prices rise too much, then everyone becomes profitable and starts producing. so they need to strike a balance to make it unprofitable enough for others, while draining their own swamp!

so they can set the lowest price which is less likely if they plan to ipo. but they could do it just to hurt other producers to teach them a lesson. i feel that the crash in oil will make their competitors think twice on fueling their expansion through debt therefore limiting supply. there is a price ceiling for oil, since everyone starts to have a reasonable profit in the $70 mark. at this point, other producers will join in the fun.

aramco also has 260.8b barrel oil reserves. second to venezuela at 300b. next person is canada at 172b. keep in mind that alternative energy is on the horizon as their costs expontentially fall. thus it is important for these countries with high reserves to monetize them before oil is replaced by cheaper alternative energy. It will take aramco 80 years to drain the swamp, hence they must ramp the production and wipe out other players.

i personally think the saudi arabia strategy to plunge oil price was a smart long term move that destroyed a lot of high marginal producers and humbled this debt fueled space! ipoing the company is a smart move to diversify their wealth into other spaces! also i feel oil prices will be on an upward trajectory! and the sauds know this, hence the ipo. coincidentally, rising oil prices is one of the strongest signals of a recession! economy is fireeeeee

#2

I’ve always argued Armaco should not get an Exxon valuation multiple. You’ve got a lot of geopolitical risk (beyond normal oil investments) and asset concentration with Aramco, as well as materially worse corporate governance. None of that with Exxon and that stuff matters. Exxon’s assets are predominantly in OECD countries. I’ve not paid as much attention to the reserves and how that is working with the IPO process, but if they don’t get a third party appraisal that should be another reason for a lower valuation. Aramco has premier assets in E&P no doubt, but having a small minority position in a majority state-owned oil company has gone wrong many times before (especially non-OECD countries). I’d want a 20-25% valuation discount to Exxon to even consider Aramco. Aramco public shareholders are probably going to get hosed at some point. They will take care of themselves first.

#3

you make fair points. but if they traded at the same multiple. id choose the sauds any day. its not about whether its nationalized or not, the key is who is the lowest cost producer, their cost even with royalties is like 25 bucks vs exxon who is prolly at 35 to 40. the sauds will want to increase the price of aramco’s ipo, but they also plan to benefit from its cash flow, which is why they are keeping 95% of the co when they do ipo.

ExxonMobil’s proved reserves totaled 21.2 billion oil-equivalent barrels at year-end 2017. exxon uses up about 1.5b per year. they have to hustle to get more. sauds just stick a straw in the ground and call it a day, even if they are lying about reserves, sauds still have way too much.

aramco pumps 3.65b per year, every 1$ change in oil is that much of an increase in profits. and they are planning to pump more to make up for any shortage as oppose to allowing another producer to ramp up, its a solid threat to every person in the business to not expand through debt and overreach. demand for oil has a constant slow growth. supply for it though shifts. production vs discoveries. but the most important is who the lowest cost producer is. you can discover 1 trillion in oil reserves but if it costs 100 bucks to produce it, does it even matter. so supply is dictated by lowest cost producer. back then, it didnt matter, but nowadays even the us can ramp up in our own background at certain price points. the funny thing is, this happened because oil cos needed to figure out how to be more profitable at lower price points.

#4

Err, maybe I am just jaded, but my perception is that there is huge corruption and inefficiency at these nationalized petroleum companies. Concepts like accountability and transparency are non existent relative to normal companies like Exxon. Furthermore, there is a big incentive to conceal information that might affect politics. All else equal, you should be willing to pay a lot more for each dollar of earnings at Exxon compated to Petrobas or Aramco.

#5

petrobras is a terrible example to use. almost 4x the cost to extract oil.

https://seekingalpha.com/article/4083876-guided-tour-oil-crash-outlook-next-18-months

#6

I agree there is a major, major different in asset type (although Petrobras owns some of the best offshore assets in the world), but I think he was concerned about state involvement. The motives of state-owned oil companies are typically different than those of purely public companies such as Exxon, Chevron, etc. There is a bad history there that goes well beyond just Petrobras.

#7

I could have come up with a better example maybe. However, my point is that state owned enterprises come with political risk and lack of incentive to perform efficiently. Usually, these companies are run by cronies of politicians, not real business people. Furthermore, their main purpose is to make the government look good, rather than maximize profits. So, you should apply a bigger discount on their revenue compared to that of private enterprise.

#8

Gazprom is a good example

#9

i see your guys point. a discount would make it a more attractive investment. btw gazprom is mostly gas.

#10

what does that have to do with the structure of the company and govt influence/control?

#11

From 1990s

Oil price has an upward trend in general.

While natural gas has an arguable downward trend if not flat.

So even if they are the lowest cost producer for natural gas, they are still producing the shittier commodity.

#12

still not sure what this has to do with the ownership structure

compare their valuation to another mammoth gas play

#13

What you talking about Nery. Oil was like $150 five years ago. At one point, natural gas was going up too. These commodities have trends whose direction depends on a lot of things. Anyway, even if oil is a non-hacksaw product, unlike natural gas as you defined it, politics or government inefficiency can still ruin the company. Look at the state producers in Brazil, Nigeria, Venezuela, Indonesia, or any one of those sh*thole middle eastern countries.

#14

Lol well I’m at a lost for words. But I honestly don’t care enough. It’s a shit commodity industry.

#15

Should also mention selection bias. If Valero or some private corporation were run like sh*t, they’ll go bankrupt. So, the remaining ones must still be somewhat ok. For government owned entities, even the ones with persistent awful structure can go on forever. Imagine investing is TSA or MTA. These organizations are run like total crap and nothing they do would be tolerated if they had actual shareholders and board of directors who have a profit responsibility and supervisory power over management.

#16

well that was a pointless year and a half exercise.

IPO not happening

#17

Who wanted to invest in this tire fire to begin with?