Saudi Arabia announced that it intends to wean itself off oil by selling a sliver of Saudi Arabian Oil Company (Aramco) and transforming the world’s largest company into an industrial conglomerate/juggernaut. But will investors even want to invest in a company that is an arm of the Saudi government, one of the most repressive regimes in the world? A country that has single-handily gutted global oil prices? I’m also not sure what investors around the world would think if President Obama releases the 28 pages of classified documents and it points to a Saudi connection to the 9/11 terror attacks.
Saudi Arabia Plans $2.0-Trillion Fund to Cut Addiction to Oil
Saudi Arabia announced formal plans for an initial public offering (IPO) for a sliver (less than five percent) of Saudi Aramco in a bid to raise $2.0 trillion to wean the country off its addiction to oil in just four years. The IPO, which would be the largest in the world, is expected to happen as soon as 2017. (Source: “Saudi Arabia agrees on plan to cut reliance on oil,” Aljezeera.com, April 25, 2016.)
The sale is part of Prince Mohammed bin Salman’s broad-based economic reform, known as “Vision 2030,” and it explains how Saudi Arabia will diversify its economy over the next 14 years. Not a bad idea for a country that gets 80% of its revenue from oil and is vulnerable to weak oil prices—which, if you’ll recall, is largely due to refusal by Saudi Arabia, the OPEC (Organization of the Petroleum Exporting Countries) overlords, to cut production.
In addition to the selling of a small piece of Aramco, the Saudi government said its economic blueprint would boost affordable housing and introduce a “green card” type of system. The Kingdom also said it would create its own defense industry.
Perhaps this is a nod to Donald Trump, who said, if elected, he would make countries pay-up for being protected by the American military. Saudi Arabia certainly falls into that category. Something tells me a lot of countries that lose U.S. protection wouldn’t be quite so bellicose in nature when dealing with their foes.
What Is Aramco Maybe Even Worth?
I digress. Vision 2030 envisions forming a $2.0-trillion state-controlled public investment fund (PIF) to become a major player in the global markets. Where the money will come from is open for debate. That’s because no one really knows what Aramco is worth. Some estimates are $3.0 trillion, while others are closer to $10.0 trillion.
The Saudis are not exactly known for being accountable. I enter as evidence the fact that Saudi Arabia has maintained crude oil reserves of approximately 260 billion barrels for years and years—despite pumping out three billion barrels of oil annually and not announcing any significant new finds. (Source: “Saudi Aramco to Become Holding Company With Listed Subsidiaries,” The Wall Street Journal, April 25, 2016.)
The math doesn’t add up. It should be cause for concern to investors who care about things like earnings.
Anyway, the IPO is expected to raise anywhere from $100 billion to $150 billion. To reach the $2.0-trillion level, the PIF will need to find additional sources of income elsewhere.
Saudi Wealth Fund to Control Global Development Strings?
If it does reach the $2.0-trillion target, you can expect the Saudis to make huge investments in the coming years. And $2.0 trillion would go a long way. The wealth fund already holds a stake in Saudi Basic Industries Corp. (the world’s second-biggest chemicals manufacturer) and National Commercial Bank, the Kingdom’s largest lender.
But Saudi Arabia will need to look beyond its borders to make investors happy. Foreign investments only account for approximately five percent of the wealth’s fund. Prince Mohammad wants that to soar to 50% by 2020…again, that’s only four years away.
The prince said the fund is already looking at “two opportunities outside Saudi Arabia” in the financial industry. Not surprisingly, he declined to name the two targets. He did say, though, “I believe that we will conclude at least one of them.” (Source: “Saudi Arabia plans $2-trillion mega-fund to wean the kingdom off oil,” The Financial Post, April 1, 2016.)
That’s just a teaser, though. Looking ahead, the prince said, “There will not be any investment or development in any region of the world without the Saudi sovereign wealth fund having a say.” (Source: “Saudi unveils far-reaching plan to transform oil-dependent economy,” Middle East Online, April 25, 2016.)
With tensions between the U.S. and Saudi Arabia high, that’s not exactly encouraging news for many investors. At the same time, investors have short memories. Maybe money will trump any political or deplorable human rights violations. Recall, if you will, that Saudi Arabia ranked second only to Iran when it comes to the worst human rights records on the face of the Earth.
I’m not the world’s most ethical investor. Is there a better stock out there than cigarette maker Altria Group Inc (NYSE:MO)? But even I have my limits. I wouldn’t invest in a publicly traded company in Iran, North Korea, or Saudi Arabia.
Again, the IPO won’t happen until 2017 at the earliest. Perhaps investors will soften their approach to Saudi Arabia. Or Saudi Arabia will hire the best PR firm in the world.