Saudi Aramco: Long May the Fantasy Continue
Updated: Jul 19, 2020
Saudi Aramco has traded up two straight days, vindicating – at least inside the closed world of KSR - that the company is certainly worth $2 trillion in spite of widespread rejection from international professional investors. This is a true fantasy, and if you want to see how we got here, read this in Bloomberg from yesterday: “The Wall Street Bankers Who Burst Aramco’s $2 Trillion Bubble.”
So what are the facts? I updated the earlier spreadsheet I used in my November 18th pre-IPO post, which I have included at the bottom of this post. The facts are that Saudi Aramco, whether its “worth” the IPO price of $1.7 trillion or the nearly $2 trillion achieved after two days of secondary trading, is wildly over-valued on a dividend yield basis (3.78% at close 12/12) vis-à-vis the five international oil companies (average of 5.57%), and dividend yield is arguably the most appropriate way to price a declining industry like oil. Moreover, when compared to Gazprom (6.51% div yield) - another emerging market oil & gas company, albeit principally a gas company – the yield would seem to entice emerging markets investors to buy Gazprom and short Saudi Aramco all day (ignoring of course the risks one might attach to Russia vs KSR, which have to be factored in). I will give Saudi Aramco this – it’s P/E is only slightly out of line mainly because the company has the highest margins / lowest lifting costs of any other producer, and its reserves are believed to be multiples of other global competitors. But still, the end product is falling out of favour as environmental concerns grow globally, and the competition is intensifying as things like fracking lower lifting costs for many producers. This is still to me a $1.4 trillion maximum valuation, but how will we ever know because, at the end of the day, this is a stitch up.
Here’s the updated chart, and I have included the change in price /share since my initial post on this subject (and Saudi Aramco in its two day life, since its IPO).