The world’s biggest IPO became even larger. Saudi Aramco (SE:2222) exercised an over-allotment option which increased the size of its IPO by $3.8 billion to $29.4 billion. According to CNN, Aramco issued 450 million additional shares. However, these shares were allocated during the book building process, which means that no additional shares will be offered on the Riyadh stock exchange.
This news will not be a major influence on Aramco’s share price one way or the other, and the Saudi government has reason to hope that the company will perform better after slumping since shortly after its debut. Tensions between the United States and Iran have lessened in the past few days. Furthermore, Reuters reported that JPMorgan Chase (NYSE:JPM) is the first major brokerage to issue a positive forecast on Aramco. JP Morgan argues that Aramco can raise production with minimal expenditure and can increase its $75 billion base dividend.
But most brokerages are either “underperform” or “hold” on Aramco for a reason, as there are significant reasons to be skeptical about this company’s performance over the long term.
War and Politics
The threat of a US-Iran war may have lessened in the aftermath of Iran shooting down one of its one civilian aircraft and the recent protests spurred by the incident. But that does not mean tensions are over. Some experts such as Hassan Ahmadian with Al Jazeera have argued that Iran’s revenge for Soleimani’s death will occur over the medium to long term.Iran may have lobbed some missiles which killed no Americans last week, but who knows what could happen over the next few months or even years? Iran could launch cyberattacks or pull off a bigger version of its September drone attack when it temporarily hampered Saudi oil production.
Other global political trends could hurt Aramco as well. Reuters reported that U.S. Energy Information Administration on Tuesday cut its 2020 world oil demand forecast by 80,000 barrels per day. Oil price forecasts for 2020 and beyond remain largely disappointing, though they are buoyed by an economy that is expected to perform well in 2020. And the Western institutional investors which Aramco still wants to pursue now face political barriers, as they face pressures not to invest in carbon emitters in general and Saudi Arabia in particular.
There probably will not be a war between the U.S. and Iran. But Saudi Arabia and Aramco face a difficult geopolitical environment, with negative effects on Aramco stock.
The IPO’s Governance
Even ignoring the military and political threats, there are other reasons to be concerned about this IPO. Aramco may have been the largest IPO ever, but the Saudi government only sold 1.5% of the company. The rest is still owned by the government, which means that shareholders will have practically no say.
Aramco advocates would point out that this is not particularly unusual. Many IPOs, as well as large established corporations like Facebook (NASDAQ:FB) place virtually all power in the hand of leadership or the CEO. The catch is that while you can count on Mark Zuckerberg to zealously look after Facebook’s long-term interests, that is not quite true for Crown Prince Mohammed bin Salman.
Certainly, the Crown Prince wants Aramco to be profitable. But the IPO is part of an effort by him to raise funds for his ongoing dream to diversify his kingdom’s economy. It is not unreasonable to believe that Salman will use Aramco as a piggy bank to fund said dreams, which would help Saudi Arabia at the expense of Aramco.
Other such state oil companies like Gazprom (MCX:GAZP) offer outsized dividends to compensate for the risk that government officials will misallocate capital. But the $75 billion dividend is, in fact, smaller percentage-wise than the dividends offered by Western oil companies such as Exxon Mobil (NYSE:XOM)
The Difficulty of Investing
It should be noted that despite its size, Aramco is not that relevant to most Western investors. Aramco is only listed on the Riyadh stock exchange and it has no plans to go public in the West. This means that if you are not a Saudi national, the only way to invest is through a holding company or ETF such as the iShares MSCI Saudi Arabia ETF KSA. That ETF has significantly underperformed over the past 12 months, with a gain of 0.88% while the S&P 500 has risen by almost 26%.
But even if you do have the opportunity to invest in Aramco, there are plenty of reasons to look elsewhere. Aramco is incredibly large and is the most profitable company in the world. But in addition to the ethical concerns of investing in Saudi Arabia, the company is not offering rewards that are contingent with the risks. Aramco may be a better investment if it substantially raises dividends, though that would lessen funds for Prince Salman’s other projects. Do not fall into the trap of thinking that bigger is better.