Last month, Saudi Arabia announced plans to maybe, possibly, IPO 5% of its oil industry.
In this segment from the Industry Focus: Energy podcast, Sean O'Reilly and Tyler Crowe go over what we know about the company so far (spoiler: not much) and explain a few reasons why, in the event the IPO goes through, investors probably should stay away from the stock, at least for a while.
A full transcript follows the video.
This podcast was recorded on April 22, 2016.
Sean O'Reilly: Saudi Arabia really, really, really wants to raise a couple trillion dollars, it looks like. Or at least a couple hundred billion, from selling a 5% stake in what is the country's arguably only industry. Why didn't they do this a couple of years ago?
Tyler Crowe: There's a couple things going on here. I'm not going to delve deep into Saudi Arabian politics because --
O'Reilly: Nobody knows.
Crowe: I don't know that very well. As you've seen, there's been some rather vocal commentary coming out from the kingdom. Not the king, but --
O'Reilly: Various princes are saying this.
Crowe: Right. Trying to get away from oil. Need to move away. Either they're trying to build this massive sovereign wealth fund where they can start to wean themselves off of oil -- one of the ways they want to raise money to get this fund off the ground is to IPO a certain segment of Saudi Aramco. It's pretty modest. They only want to sell about 5% of the business. Granted, that 5% is a lot, because it's such a big company. From an investing standpoint, it's going to be listed on the New York Stock Exchange, so you and I can buy it just like anybody else. Before anybody gets too excited about this, I'm sure there's going to be a ton of media like, "Should you buy Saudi Aramco when it IPOs?" Right now, we don't even know what the heck we're going to get. They said, "Oh we're going to 5%." Does that mean 5% of the whole thing? Five percent is just certain segments of assets? We don't have the slightest clue what that necessarily means.
O'Reilly: That was the most interesting part of the Wall Street Journal article I read the other day. It was entitled "Saudi Aramco IPO could be 5% of value." As you said, value of what? The most interesting thing I read was they're not even sure if they're going to include the country's oil reserves. As I understand it, the country is structured to where everything is the property of the Saudi royal family. It seems to me like they could do whatever they want with all the stuff anyway. I'm almost inclined to say: Give me the refining assets and you keep the oil. I don't know.
Crowe: It's one of those things again, too, where you're looking at a business that is trying to serve two masters. What we have seen, at least in the oil industry over the past several years, is a company that is trying to serve two masters like that in terms of being a hybrid of a state-run oil company, and being one that is publicly traded where it is beholden to returns -- those can be conflicting things.
A great example of that is Petrobras (NYSE:PBR) in Brazil. Never mind all of the things that have gone on with the kickback scandals and corruption as of late. If you watched Petrobras at the early times, it was "We have this immense opportunity because we have these pre-salt fields. They're huge. We need to raise some capital." They wanted this hybrid model where they could raise the capital and generate returns for investors over time. The only problem is that there were so many restrictions from the state-run side. It's like, well, you still need to subsidize gasoline prices within the country, so you're automatically going to take a loss on those. You have to have certain local content restrictions so you can't be the most competitive on price all the time in comparison to an oil major. When you have those conflicting --
O'Reilly: Do you contract out to just Brazilian companies when it's all --
Crowe: When you have those conflicting interests, it can be very very difficult to balance that. If you look across Petrobras, PetroChina (NYSE: PTR), even Sinopec (NYSE: SHI) to a certain degree, it's very hard for a company to serve both of those masters well and to have everybody satisfied. Sure, Saudi Aramco might make 5% available. Is it going to be a great investment? It's going to be really hard to tell right now. Don't go jumping in the minute you see it.