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You can’t buy shares in the new public company Saudi Aramco. At least not easily.
And that’s a very good thing.
I wouldn’t touch the shares of what is now the world’s largest publicly traded company with a 10-foot pole. And you shouldn’t either.
And the reason they’re hard to buy? Aramco’s stock is only listed on the Saudi Stock Exchange (called Tadawul). And if you did manage to buy some, non-Saudi buyers have a minimum 2-year holding period.
It’s tempting to ask whether the Aramco IPO will be more like the success of Beyond Meat (BYND), or the flop of Uber (UBER). I’d argue that the Aramco IPO is so different versus the others that we’ve seen this year, that it should have its own category. And it’s a category to avoid.
There are two companies that I do like in the energy sector. They are MUCH better investments that Aramco’s overly hyped IPO to trade or invest in. I’ll tell you about them below.
But first, let’s dig into the horrible coverage of the IPO…
The Media Has Its Head Buried in the Saudi Sand
Here are the top search results this morning after the shares went public yesterday:
CNN: “Saudi Aramco IPO: Shares spike after historic market debut”
CNBC: “Saudi Aramco shares surge 10% as historic IPO begins trading”
New York Times: “Saudi Aramco’s Share Price Soars in I.P.O.”
I could go on.
But here’s what those headlines missed: The Aramco IPO was a disaster. And it’s going to get worse.
Just three short weeks ago the Saudi royal family and their advisors were insisting on an IPO valuation of $2 trillion dollars. The valuation was finally set 15% lower on Monday. That $300 billion in lost valuation would be the 14th biggest company traded in the U.S. behind Bank of America, and slightly ahead of Exxon Mobil.
So while the media is focusing on the fact that the new Aramco stock went up 10% on its first day (and then 8.3% on the second day of trading), they’re missing the point. This hype-driven push up was from a seriously reduced opening price. And in the propaganda-driven media coverage, the constant shouting about how the new public company is bigger than Apple (AAPL) and its $1.2 trillion dollar valuation is missing all the problems with this IPO.
Let’s look at a few of the main problems.
The Certainty of Volatility. In a very unstable geopolitical region, the risk of oil flow disruption is always present. And we saw a clear vulnerability to attack in September when the Saudi oil production facilities were hit by missiles.
The Uncertainty of oil prices. One of the biggest obstacles to Aramco’s stock price upside is the new leader in oil production – The U.S. shale oil producers. Here’s a chart from the U.S. Energy Information Administration that shows how U.S. oil output has grown:
This is an astounding rate of growth – up over 125% in less than eight years. And The U.S. production dominance can be seen in the monthly numbers for 2019 through September:
Not only is the U.S. far ahead of Saudi production, but U.S. production is also growing, as you can see in the circled figures above. For those curious about Russian production, it was at 10.8 million barrels in September of 2019. Not sure why the World Atlas graph didn’t include that… But the issue is clear – Saudi’s oil production is high, but the U.S. production growth will keep a cap on prices for the foreseeable future.
Stock Governance. The $25.6 billion worth of shares sold during Aramco’s IPO represents only 1.5% of the $1.7 trillion valuation of the company. So the Saudi royal family still unequivocally controls Aramco. Decisions on oil production schedules and other issues to do with how much profit and cash flow is generated will be based on national and royal family needs and desires, and not on those of shareholders.
Already, several investment analysts, including AllianceBernstein, have called the quick run up in share price to give Aramco a $2 trillion valuation a bubble. And I fully agree.
Energy Stocks That Are Well-Positioned to Profit
If you’re looking to invest in the energy space, buy these stocks instead:
- My favorite stock in the energy is Enbridge Inc. (ENB), the $74 billion oil pipeline behemoth from Canada. Because they transport crude oil and natural gas products, they are much less sensitive to fluctuations in oil prices.
- NextEra Energy Inc. (NEE) is one of the companies that is executing well in the renewable energy space. They generate, distribute, and sell electricity with a heavy investment in wind and solar. They are showing strong profitability and have a good track record in managing capital expenditures.
Both of these stocks are solid picks that will vastly outperform Aramco, especially after the IPO hype wears off.
Great trading and God bless you,
D.R. Barton, Jr.