Saudi Aramco Plans World's Biggest IPO | Hacker News Reader

Saudi Aramco Plans World's Biggest IPO

bloomberg.com

104 pointsaburan2895 comments

I've got your prospectus right here: http://rameznaam.com/wp-content/uploads/2014/10/Welcome-to-t...

And http://rameznaam.com/wp-content/uploads/2015/04/Nature-Clima...

As soon as we hit $100/kWh in the next year or two, that oil is worthless [1] (Tesla will supposedly hit this target when the Gigafactory is at full capacity).

Clean energy investments year over year: https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iWfsqt_Qmf9...

[1] https://flowcharts.llnl.gov/content/energy/energy_archive/en...

That oil will still be worth trillions for the next two decades. It won't be worthless until the global economy has moved very substantially off of oil. It won't even plunge toward worthless until demand begins to dramatically fall off, which isn't going to occur in the next two or three years.

The Saudis will likely have time to liquidate a very large portion of Aramco and its oil assets before the market for oil dries up too much. In 20 years they can exhaust over half of their oil reserves (by some estimates, they'll be a net oil importer by 2030-2035). They'll sell well over ten trillion dollars worth of oil in that time.

It will take decades to shift the global economy and industry off of oil. In ten years, the majority of cars on the road globally will still be burning gasoline. That hopefully won't be the case in 20 though.

Burning gasoline isn't the problem, burning gasoline that's sourced from the ground is. It's possible to use a lot of electricity to run gasoline combustion backwards, turning CO2 and H20 into gasoline. It's currently not economical due to electricity prices, but it may be a better option to retrofit gasoline production rather than automobile fuel consumption.

> (by some estimates, they'll be a net oil importer by 2030-2035).

That's kind of a 'funny' observation. Saudi Arabia can't ever be an oil importer since the only thing they have to exchange for oil is oil.

I'm fairly certain the rest of the world would be happy to exchange cash for oil or oil for cash.

Saudi Arabia doesn't have any real way to earn cash except by selling oil. There is the whole Mecca thing, but that's it.

I'm not sure what part of this you're not getting. They're selling off a small stake of the state-owned oil company to diversify how they make money. They'll use the remaining money + new income from the corporations they'll build/buy to import oil. This isn't a hard concept to follow.

It won't be worthless but it will be worth less.

There are other uses for oil besides gasoline that are not going to be displaced anytime soon. Jet fuel, home heating(could be if solar gets exceptionally cheap, but unlikely anytime soon), asphalt, plastics, etc. Those uses alone probably can't support oil at even its current depressed prices, but it will hardly be worthless for decades to come.

heating with oil is expensive. solar panels actually can heat well. just heat a block of concrete. the concrete is the battery. electrodacus is doing this now.

Burning natural gas is among the cheapest forms of heating we have, and it works 24/7/365 and at all latitudes. Solar heating using a slab as a heat reserve requires re-engineering houses completely and may be impossible in a lot of places that don't get a lot of sun during the coldest months.

sure, nat gas works great where lines go to your house. I was at a house in the seattle area last weekend (a well developed metropolis) where people had propane. Solar goes everywhere, but depends on good weather to be useful.

Solar panels heat well in sunny weather. Which is the opposite of when you need heat :)

Also need to design and build with materials that maintain as constant a temperature as possible. Double glazing, insulated walls, floors and roofs, orientation to the sun etc.

Perfect statement of someone who more than likely lives within a city with public utilities. However, there are actually a large amount of people in rural U.S. that have to use either Oil or Electric heating (in which both are expensive). In These rural area's, Oil heating is the norm and in order to convert to an electric heat there are extensive cost's involved (which most people in these area's cannot afford). Living in a city (especially west-coast) has certain amenities that the rest of the U.S. does not. Complete solar power in rural Wisconsin or the Dakota's for example isn't a real viable option. There is much less sunless then the west coast and extreme season weather changes (humidity, rain, snow, hot/cold).

They ll use the IPO money to invest in solar.

No, they will use that money to diversify out of oil (energy).

No, they will use that money to pay their inefficient and unproductive, sometimes parasitic public service workforce. Then their religious schools and holy men, then buy more weapons.

What a misleading chart. A lot of this discussion about solar reminds me of the peak oil discussion that happened around 2005.

Oil is tanking due to US non-conventional oil and fracking. I think natural gas power generation will be relevant for decades.

Petroleum is a great way to store energy. Battery technology hasn't improved a whole lot in 200 years.

This may well be the biggest attempt ever to get out at the right time

Peak Oil, then?

Peak Saudi oil, perhaps.

Peak profits from oil. They're desperately trying to sell as much as possible before renwewables eat their lunch. This is why the free market cannot solve global warming by itself - we'd need to leave lots of oil in the ground and countries like Saudi Arabia have a huge amount of latitude to drop prices in order to ensure this doesn't happen. It's not enough to just be cheaper than oil, you need to be cheaper than anyone can afford to drop the price they sell oil at to undercut you.

They're desperately trying to sell as much as possible before renwewables eat their lunch.

This is not the case. It may be in the next 10-20 years but the real reason is due to fracking. The fact is that the US / Canada has added additional supply to the market and no longer imports as much oil from OPEC.

http://www.drillingcontractor.org/wp-content/uploads/2012/04...

makomk is right. US crude production is dropping since Saudi Arabia increased supply to drop oil prices below what the other suppliers can support. https://ycharts.com/indicators/us_crude_oil_field_production

US crude is sold at market prices and is NOT specifically dependent on Saudi Arabia supply increases (e.g. another oil producer could cut production and zero out that increase).

Also, the price fell long BEFORE Saudi Arabia increased production (about a year). This was due to excess supply and why Saudi Arabia tried to cut production in 2014.

http://www.artberman.com/wp-content/uploads/Chart_Market-Bal...

https://ycharts.com/indicators/saudi_arabia_crude_oil_produc...

You have it exactly backwards. Saudi Arabia removed production caps in 2014. Shale fields cannot produce oil profitably at the resulting prices and are shutting down. http://mobile.reuters.com/article/idUSKCN0JA0O320141128

Yeah. Back when theoildrum.com was running, they'd post the reports on reserves for Saudi Arabia. SA are developing new fields, but compared to their rate of extraction, I didn't think it looked too pretty in the long term.

The right time? They should have done this in 2007, when oil was $150/bbl. I would say this is a move of desperation...

The only reason oil is so cheap right now despite much higher consumption than in 2007 is that Saudi Arabia specifically decided to massively increase production, breaking OPEC. They did this because they see the writing on the wall. Better that they get all the remaining money to be made from oil and cut out entirely the people who extract oil less cheaply from shale and other sources.

Your thinking Saudi Arabia UNILATERALLY caused the oil glut. IF that were the case, Saudi Arabia would be more powerful than OPEC, etc. They are not. The thing is most of the world's oil producers were pumping oil at ever increasing quantities:

https://en.wikipedia.org/wiki/File:Top_Oil_Producing_Countie...

As oil prices went down, they had to pump MORE to maintain operating costs.

http://econbrowser.com/wp-content/uploads/2016/01/us_oil_jan...

http://econbrowser.com/wp-content/uploads/2016/01/crude_oil_...

http://econbrowser.com/wp-content/uploads/2016/01/saudi_prod...

http://econbrowser.com/archives/2016/01/world-oil-supply-and...

You just proved his point. Everyone sees the writing on the wall.

Love,

Kneegrown

If it were possible to get in short on this (it's usually not, right after an IPO), that would be the best investment decision anyone's ever made. $2 trillion is ridiculous. Remember when PetroChina hit $1 trillion market cap in 2007, and it was supposed to be a huge milestone for publicly-traded state oil firms? Now they're at a little over a tenth of that. Every reason to expect that the same thing will happen here.

PetroChina's valuation in 2007 has very little to do with Aramco pricing its future IPO. That said, you can just go short oil in general, if oil demand is lagging Aramco will be worth a lot less than $2t.

> that would be the best investment decision anyone's ever made

Oh now, the best investment decision anyone has ever made, was Masayoshi Son buying a third of Alibaba for $30 million or so. I don't think shorting Aramco is going to get you a ~2,500 fold return in 14 years.

It's not so cut and dry. One reason Aramco is worth so much is that the cost to extract their remaining reserves (on a per barrel basis) are one third of costs in the U.S.

A collapse of oil prices may decimate the energy industry in the developed world (which extracts from offshore or unconventional sources) and would mean Aramco becomes the only supplier. Now obviously they wouldn't be able to raise prices beyond a certain level, but they have many decades of guaranteed cash flow remaining.

Even if their costs to remove are 1/3 lower its high sulfur and far from consumers, and its priced in dollars. Refining and logistics costs are high.

Saudi Aramco's annual revenue is over $300B, and their reserves are more than 260 billion barrels. Oil prices have ranged from $15-ish to $140-ish since 1990. So $2 trillion doesn't seem outlandish at all for Aramco.

Early angel investors in Uber have made about 10,000x, plus or minus, so even if you're right there's no potential for shorting Aramco to be the best investment ever (Uber's seed round was at 4 millionish, and the current valuation is 60 billionish).

> Oil prices have ranged from $15-ish to $140-ish since 1990.

What is the relevance of past oil prices in the future? Especially in light of photovoltaics?

If you have a conviction about oil prices that's a really easy bet to make.

The danger is that you're at risk to a surge in oil prices. While the company may not be well run, if oil prices rise, you could get killed in the short. The ideal trade would have some kind of oil price hedge too.

I'm not so sure. Their reserves are massive + cheap to extract. Oil isn't going to go away anytime soon, even if we wanted it to. And even if the value of crude dropped another 25-50%, it's still quite valuable.

The problem is that it's located in Saudi Arabia. I doubt they have decent corporate governance + non-interference from the state.

If the Saudi government thought that the company was a good investment, they would invest in it themselves and reap all the rewards, even if it meant they had to print currency to do so. In other words, they'd continue doing what they've done all along.

Instead this seems like an "exit" event. A way to sell at the top and use the funds from the greater fools for other means.

It's a way to diversify their investments for the long-term health of their country. They need other sources of income...

Saudi Aramco's IPO would never have happened without Prince Mohammad bin Salman (Salman might be the king, and Mohammad bin Nayef might be the crown prince, but MbS is "Mr. Everything") consolidating power and courtiers.

Okay, HN, crush my expectations. How is MbS not actually the liberal reformer that western media fawns over and says he is?

Also, what odds do you you have on rival factions in the House of Saud ganging up on MbS and pulling a King Faisal? I have 15/1 odds that the other princes will at least attempt to push him out of prominence (they probably won't kill him)--the Saudi royal family has 15,000 princes, after all.

Finally, I think that "perestroika, GCC style" might be the best or the worst thing to happen in the Middle East in over 50 years. Think about it. Iran has used its large, wealthy, well-educated population (80 million people) to maintain a geopolitical foothold in the Middle East and Central Asia, even under crushing international sanctions. With an absolute theocratic monarchy, an old-world economic structure based on clan ties, and a population of only 32 million (21 million if you subtract out the expatriate population), Saudi has been able to amass otherworldly concentrations of wealth. Imagine how much change those Saudi trillions could do for the country, the region and the world at large the if MbS's dream of a post-oil economy and economic liberalization came through. (Plus, Saudi gets on the good side of the west so it doesn't have to worry about sanctions.) Imagine if Saudi's population boomed and became more and more educated. 40, 50, 60 million. Imagine how the geopolitical fisticuffs with the Ayatollah and the Revolutionary Guard might turn into a détente, or get even worse.

Even assuming that's the kind of Saudi Arabia Mohammad bin Salman wants, it will take generations to lift the people off the oil teat and into a productive western, capitalist economy. It might just barely be starting to pay off near the end of his lifetime, and that's being pretty optimistic IMO. He isn't just fighting the economy either, but the cultural and religious attitudes of the people.

The only thing I can imagine is more wahabisim, more madresa at Pakistan and other poor countries. More ISIS like terrorist groups and more terror, blood and fear for humanity.

The company is valued at $2 trillion, the value of the IPO is expected to be 5% of that. Title seems misleading...

isn't the valuation based on: (1.00 / (percent sold off)) * (amount the chunk was sold for)

so 1/.05 = 20, and 20 * 100 billion = 2 trillion?

Yes, and also rewritten in a way that breaks the HN guidelines. We've replaced it with a subtitle from the article.

(Submitted title was 'Saudi Aramco Announces Largest IPO in history valued at $2 trillion'.)

Ah, I apologize for the misleading initial title

Appreciated! Not too big a deal.

There is a geopolitical element here.

What happens when US mutual funds and retirement funds are invested in this stock?

Will the mutual funds lobby the US Government to put sanctions on Iran to give Saudis more output and more revenue to ultimately benefit the funds?

What happens if Saudis are linked further to 9/11 or to other activities that goes against US' interests. Will the banking sector lobby the congress against taking any actions against Saudis?

The open shares that Exxon(market cap 370B) has on the market exceeds the number of shares that Saudi Aramco will have(100B). So this won't have a very large impact.

If you thought owning part of a company in China was difficult, consider the problems of owning part of one in Saudi Arabia.

A is not difficult, and B is also won't be difficult as it will list on the London Stock Exchange or one in New York

It's not that you can't buy shares. It's that ownership doesn't give you any influence over the thing. Look at Yahoo's troubles with Alibaba.

Influence seems theoretical anyway due to the enormous size of the company.

How much would you need to buy of a $2 trillion company to get a board seat? 10% might not be enough even in an ordinary public company, and that's $200 billion in this case...

They're trying to get out now by selling to suckers who don't realize that most of their oil assets are worthless. I don't mean that they've falsified accounts of how much oil they have, I mean that most of it is going to stay in the ground because it won't be worthwhile to pump it out.

Selling 5% barely qualifies as getting out. Perhaps it's a way to funnel money to specific families or people, but it would be very hard to sell the remaining 95%.

hm, just $100,000,000,000 for less than 5% of Saudi Aramco. That's quite low, valuing themselves at 2 trillion. Prior pie in the sky estimates had put them at 10 trillion dollar company. So maybe after the independent audit they'll release the shares, wall street traders will bid it up 500% and then they'll impress everyone with that share price performance and 10 trillion dollar valuation.

10 trillion is crazy! the US GDP is 16 trillion and world economy worth 100 trillion, to think one company worth this much is ....

GDP != Worth

Theoretical 10 trillion is a stock; GDP is a flow.

https://en.wikipedia.org/wiki/Stock_and_flow

> It's valued at more than $2 trillion — or about four times the biggest technology giants

Powerful reminder of how pervasive & huge the energy economy is.

... now imagine that, if you refined oil to reduce its mass by a factor of a million or so, you ended up with an edible substance that extended your lifespan by DECADES.

Stakes is high, right? Nicely done, Frank Herbert.

Contrarian view. The IPO forces oil producing states to cut production and raise prices or watch the market value global oil (For which the Saudi holdings are proxy) at discounts that will wreak havoc on sovereign and corporate balance sheets. This is a game of chicken.

I'm curious about their long-term outlook. My understanding is that OPEC counties are currently desperate enough for money that they can't agree to limit output, thereby forcing the price further down. Anyone have better insight here?

I think maybe that's why they're trying to get a ton of money, and as others are saying, exit.

Saudies want Iran to cut production too, but Iran was forced to cut production because of sanctions and they missed lots of revenue when oil price was high. Iran is not going to cut production or cap it. Saudies have 2 bad choices let the prices fall or stay the same or let cut production and let Iran get more revenue and lose market share to her.

Iran is trying to get back to the production quotas of pre-sanction period. Saudis do not want that (they opposed the Iran deal).

They also want to prevent any investment in Iran oil sector by lower the lure of potential windfall from foreign investors until the next US administration is in power to potentially reverse Obama's policy.

Well at least in the short-term: Due to the oil-price shock Saudi Arabia's state earnings turned negative and at the current burn-rate are supposed to erase it's monetary assets rather in months than in years.

I've heard two narratives, that being one of them. The other is that they're keeping output artificially high to lower the price of oil in hopes of "pricing out" alternative sources like shale.

They say global economy worth $100 trillion. the whole oil industry should worth $18 trillion, is oil %18 of oil economy? I say no. so Aramco doesn't worth $2 trillion either.

The article states that Saudi Aramco controls ~20% of the world's oil supply. The $18 trillion valuation of the global oil industry that you offered would imply a $3.6 trillion valuation for Saudi Aramco. Obviously there are many nuances to this, but $2 trillion is not unreasonable superficially. It's important to note that state owned oil companies tend to trade at lower market caps after IPO for a variety of reasons.

>Saudi crude accounts for about 1 out of every 9 barrels of global production.

Production is analogous to revenue, and is the wrong measurement.

Reserves matter more for market cap.

ok, still they have %20 of world reserve. so oil reserves worth 10 billions and %10 of world economy! in US we have more oil consumption than any other nation, do you spend %10 of your money on oil???

Probably more than 10%. Recall that fuel costs are priced into every single item that gets shipped, which is basically all of them.

Oil isn't just gas for your car. It's also gas for the trucks that move products around, asphalt for the roads, fuel for planes, heating oil for homes, oil used to generate electricity, and oil used to make plastics.

So, yes, I do.

You're confusing a stock with a flow. If we all spent 10% of our money on oil, their revenue would be 2% of GDP and market cap would be greater.

Say they have 60% net margin and market discount rate is 5%, fair value would be $180 bn * 0.6 * 20 which gets you comfortably past 2 trillion. Their revenue is over double Google.

Yes, but they have very cheap production costs which makes their oil more profitable than the average barrel. They have loads of it still in the ground. And finally they also refine and make other petrochemicals. It's quite a valuable firm.

Maybe they are talking about reserves worth at current prices?

Now that's what I call an exit!

Actually it is just a primer for the bigger exit.

The best time to exit for a large scale venture like this is between right before the peak and right after it.

$2trillion would be 2.5x the next largest sovereign fund (Norway). That is enormous.

"Only" a $100bn IPO.

This is really not the time I'd be investing that heavily in Aramco. 30 Years ago, certainly, now... not so much.

There are other reasons to invest. I believe mostly oil companies will want to take stock for the purpose of influence.

30 years ago you would have needed a blue water navy and nuclear weapons.

And the fact that you won't next year tells you something ...

exactly what I was thinking (& lets just leave it with ... ;)

It still might help to hold onto your investment...

China will need oil for a while...

Huge growth potential here!!

Reply on news.ycombinator.com