Special Report: Saudi Arabia's Toxic IPO

When we heard about Aramco’s possible 2016 IPO, our jaws dropped to the floor.

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Aramco owns, operates, and develops all energy resources based in Saudi Arabia. The company has the world’s largest crude oil reserves, as well as the largest daily production.

If you thought Exxon was an oil giant, think again.

Exxon is valued at $314 billion.

Aramco is worth 10 times more — and that’s the conservative estimate. Other analysts at the Wall Street Journal have estimated its value as 20 times more than Exxon.

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With numbers like this, the IPO is almost impossible to ignore.

But before we discuss anything else, it’s very important that our readers know one thing:

“Aramco” is synonymous with “Saudi government.”

“Aramco is essentially an instrument of state policy, and its methods and reserves tantamount to state secrets.” — WSJ

The public offering of Aramco (if it ever takes place) will be unlike any other. It is impossible to overstate how closely this company is tied to the government of Saudi Arabia. The giant company is easily the biggest and most valuable weapon of the Saudi regime — bankrolling royal handouts and “keeping its young population content with cradle-to-grave jobs.”

First, let’s consider the motivations behind Aramco’s public offering. Right now is a tumultuous time for Saudi Arabia. The Saudi economy is utterly dependent on petroleum, and despite the recent welcoming of private investments, the country needs to explore more market-based approaches. Aramco has been historically used to generate financing for military and political campaigns. Most recently, these include military operations in Yemen, the ousting of Syrian President Bashar al-Assad, and cutting ties with Iran.

Unfortunately, plummeting global oil prices have made it difficult for the Saudis to secure funds, and this directly impacts their strategy for regional dominance. Factor in the impending post-sanctions rise of Iran, and the Saudis are feeling a genuine threat.

“Last year alone the kingdom burnt through US$104 billion, or 14 per cent, of its foreign reserves, and will be tapping bond markets to finance an expected US$98 billion fiscal deficit this year. A partial Aramco flotation could help fill its coffers again.” — The Economist

To be honest, the IPO looks like a desperate move to acquire money, plain and simple.

If that’s not enough to deter investors, let’s look at the “board of directors.”

Again, Aramco = Saudi Regime.

The company takes its prime directives from the House of Saud, which has repeatedly proven to be economically irresponsible. Ask any oil expert, and they’ll likely blame Saudi Arabia for the oil prices we’re seeing today. In the past, the global economy could depend on Saudi Arabia to reduce production, therefore regulating prices. (Commodity scarcity = increased prices.)

Unfortunately, the Saudi oil minister declared recently that “those days are over.”

We haven’t seen prices like this since 2004, and it’s mostly because the Saudis refused to cut back production. Even in a saturated market, Aramco kept pumping out more than 10 million barrels of oil per day in a failed attempt to compete with the U.S. and Russia.

(Just a reminder: The price of one barrel of oil is currently lower than the actual barrel itself.)

The bottom line here and that Saudi Arabian oil giant Aramco will not be a healthy investment. (That is, if the company ever actually goes public.)   

No matter how valuable a company is projected to be, any financial advisor will tell you to stay away from desperation — it’s toxic to an IPO.

Even further, corruption is running rampant throughout Aramco. In his interview with a representative from The Economist, Saudi Prince Mohammad bin Salman admits that corruption is a significant issue and hopes that an IPO (which will hold the company accountable to shareholders) will help eliminate those concerns.

Think again, Prince.

Aramco representatives have announced that only 5% of the company would be listed on the Saudi stock exchange and that “the company would not forfeit any control over its operations to shareholders.”

All in all, investors should be running far away from Aramco. In fact, you should be running away from any company that publicly admits to corruption and reeks so strongly of desperation. Disregard value projections, and think about the basics.

Still, it’s impossible to not get excited about such a shake-up in the energy sector. That’s why we’re going to leave you with some other options to get involved in energy investing.

These companies might not boast multitrillion-dollar values, but they are reliable, exciting, and not run by a corrupt royal family intent on financing guerrilla skirmishes around the region. Even more, these companies represent the energy of the future. It doesn’t take an economist or an energy expert to recognize that oil is going to face some significant competition from alternative energy options in the next few years alone.

Don’t Look Back

Fossil fuels took a massive beating in 2015. Oil, coal, and natural gas prices all hit record lows, and so did investments in those sectors.

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Most analysts expected this trend to permeate the energy sector as a whole, including renewables, but recent numbers proved those predictions wrong.

According to Bloomberg New Energy Finance, renewable energy enjoyed $329 billion invested and 121 gigawatts of capacity added to infrastructure — thresholds that have never before been reached.

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In case you missed it, Denmark began 2016 with a momentous announcement.

Over the course of 2015, the Nordic nation was able to generate more than 40% of its electricity from wind turbines. This is the highest figure on record.

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In western regions of the country — Jutland and Funen — wind turbines accounted for 55% of electricity production. On one particularly windy day, Denmark’s wind turbines produced so much electricity that the nation was able to meet all of its energy needs and then export another 40% of its power elsewhere.

Denmark’s achievements in the wind energy sphere have garnered the attention of European alternative energy officials. The European Wind Energy Association (EWEA) has declared a renewed effort in wind energy research, particularly focusing on how wind-generated electricity can be integrated into Europe’s existing power systems.

“We are now at a level where wind integration can be the backbone of electricity systems in advanced economies.” — Kristian Ruby, Chief Policy Officer, EWEA

Despite the tumultuous history of wind power, all signs are pointing to a renewed and legitimate focus on this alternative energy. Earlier in December, more than 190 nations signed a climate agreement in Paris, a measure for transforming the world's fossil fuel-driven economy within decades into renewable energy sources such as wind. This is just one reason we’re encouraging our readers to investigate wind turbine manufacturers.

As you’re reading this, Nordex (OTCBB: NRDXF) is completing negotiations with Turkish developer Bilgin Enerji to supply four wind energy projects in the western region of the country. The 100-MW deal will be comprised of four separate phases, summarized here.

A week before the Turkish deal was disclosed to the public, Nordex signed a 15-year deal with Ireland. The most recent agreement will add to the 700 MW that Nordex has already installed in the country.

In the November 2015 earnings report, Nordex announced earnings of €97.6 million ($106.6 million) for the first nine months of the year — an increase of 63% from the same period of 2014.

Also in 2015, Nordex acquired Spanish competitor Acciona Windpower — an agreement that both companies are labeling as a merger.

In a statement from Nordex: "In combining activities, Nordex and Acciona Windpower will create a truly global company and, in doing so, reduce exposure to demand swings in individual markets."

Another dynamic option for investors interested in a pure wind power play is Vestas Wind Systems (OTC: VWDRY). The Danish company has just recently booked the highest order intake since 2010, with orders for almost 8,000 MW of capacity. The deal is worth a little over $7.99 billion and comes at a perfect time, in conjunction with a U.S. tax credit extension for wind farmers. The tax break will directly increase demand for wind turbines in the U.S. market.

However, we understand that wind is still relatively uncharted territory. So for those investors who are more comfortable with more diverse energy options, consider hybrid companies like TransAlta Renewables (TSX: RNW) or SunEdison (NYSE: SUNE), both of which have stakes in wind, solar, hydro, and fossil fuels.

If you do a quick search for SunEdison, the results might alarm you. Since the beginning of 2016, shares of the world’s largest renewable energy development company have decreased in value by 45%. Share prices are currently hovering around $2.50 (compared to $30.00 last year). The company has been hemorrhaging since the middle of 2015, accruing more than $11 billion in debt.

But take a moment to consider the upside value of this company. The management at SunEdison is navigating some very significant (and wise) strategies to remove themselves from the current crisis. Despite some debt restructuring and legal issues, the stock is still likely to climb. Many analysts believe the market is pricing in a credit event and that the real value of the company is significantly higher than advertised. This one is high risk, high reward. Keep it on your radar — now is the time to take advantage of potential gains.

TransAlta Renewables is a Canadian power company that develops, owns, and operates a multitude of power generation facilities. According to the company website, TransAlta operates 12 hydro facilities and 16 wind farms throughout Canada. Most recently, TransAlta announced the closing of its investment in several other facilities, generating a value of $540 million. As a result of the transaction, the Board of Directors declared a dividend increase of 5%.

"This Transaction represents another step in the growth of the Company through the acquisition of stable cash flows that further support a growing dividend and provide incremental value to our shareholders.”  — Brett Gellner, President of TransAlta Renewables

Currently, the company operates with about 65% gas and renewables and 35% coal. As the company continues to shift away from coal, it commits to a disciplined strategy in terms of risk profile. However, there is significant promise here as TransAlta prepares for the transition further into renewables. It’s no surprise that the transition aligns with Canada’s climate plan and diversification strategy. As of now, TransAlta Renewables is confidently poised to take advantage of future energy policies.

Before we part, I'd like to extend a sincere thank you for joining us here at Wealth Daily. We look forward to providing you with valuable investment research and commentary over the course of your subscription. Our core philosophy is that the more you know, the better you'll be able to take advantage of that knowledge and expand your wealth. We'll continue to share our insights on how you can boost your portfolio with flexible and safe investments.

Sincerely,

Wealth Daily Research Team


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