When it comes to publicly traded companies, bigger is often better. After all, mega-caps like Apple and Microsoft have been some of the best performers on the market in recent years.
But last week, a new firm joined the ranks of publicly traded companies with market capitalizations above $1 trillion: Saudi Arabia’s partially state-owned oil company, Aramco.
The Aramco IPO received lots of fanfare around the world — not least of all because it pumps 10% of the world’s oil. But that doesn’t mean it’s a good investment.
In fact, Aramco — which is now the world’s biggest public company — could soon become one of the world’s most disappointing new stocks.
Today, we’re pulling back the curtain on this record-breaking but problematic IPO and showing you how to avoid unwanted exposure to this soon-to-be-ubiquitous stock.
Overvalued and Under-Yielding
Aramco is valued at roughly $2 trillion at the time of this article. If that number sounds ludicrously high to you — even for the world’s largest and most profitable energy company — that’s because it is.
At a $2 trillion valuation, Aramco’s dividend yield works out to less than 4%. That’s significantly below the yields of other multinational energy giants like Royal Dutch Shell (NYSE: RDS-A), which yields 6.51%, or BP (NYSE: BP), which yields 6.66%.
Institutional investors in large energy companies are often mainly motivated by dividends, so it’s likely that Aramco’s market cap will fall in the future until its yield converges with those of its peers.
This glaringly obvious valuation problem begs the question: How did the Saudis get Aramco to a $2 trillion valuation in the first place?
The answer is simple: The kingdom’s famously ruthless crown prince, Mohammed bin Salman (MBS), scrapped a plan to list Aramco on the New York Stock Exchange in favor of a listing on Saudi Arabia’s Tadawul exchange. Then he threatened the kingdom’s wealthiest families — many of whose members have been jailed by MBS — into buying enough shares.
In other words, Aramco’s lofty valuation is the result of authoritarian decision-making — not the result of solid fundamentals.
Speaking of authoritarian decision-making, Saudi Arabia’s political culture and place in the world provides another compelling argument against buying Aramco…
Rule of Law Concerns & Geopolitical Risks
The arm-twisting of domestic investors wasn’t the only worrying event in Aramco’s path to an IPO. The Saudi government has also repeatedly fired, sidelined, or otherwise silenced executives and bankers who have expressed any skepticism about MBS’s vision — including IPO preparation chief Motassim al-Ma’Ashouq and Goldman Sachs underwriter Jonathan Penkin.
What’s more, the current Aramco chairman, Yasir al-Rumayyan, is a former mid-level investment banker with no oil and gas experience. He got the job back in 2016 — at the start of the IPO process — because his vision for Aramco aligned with MBS’s, not because of his qualifications.
These issues point to a general lack of integrity in the way Aramco is funded and managed, something that should be a massive red flag to any investor.
What’s more, in the wake of the September drone attacks by Iranian-backed forces against Aramco facilities, investors should consider whether they want to take on the geopolitical risk inherent to investing in a Saudi oil company.
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If overvaluation and political concerns weren’t enough to deter you from thinking Aramco is a good investment, then the growing number of alternatives to Saudi oil might.
MBS initially proposed this IPO in order to raise funds for non-oil-related investments in the Saudi economy. And he did that in the knowledge that American frackers were starting to eat Aramco’s lunch.
Put another way, the crown prince wanted a blowout IPO for its troubled oil giant in order to diversify his country’s economy away from said oil giant — and to leave IPO investors holding the bag.
Incidentally, many of those frackers sport much more appealing valuations than Aramco. Apache Corp. (NYSE: APA), Occidental Petroleum (NYSE: OXY), and EOG Resources (NYSE: EOG) are all on sale today — they’re down by double digits over the last year.
How to Avoid Aramco Exposure (It’s Harder Than it Sounds)
At this point you might be thinking, “Okay, Sam, we get it. Aramco is a bad investment. But you just said it trades on a Saudi exchange, not an American exchange. So we couldn’t own it even if we wanted to.”
Unfortunately, in these globally interconnected financial markets of ours, avoiding exposure to this multitrillion-dollar disappointment isn’t so simple.
You might not be able to buy Aramco shares, but some of your favorite fund managers can (and will). After all, certain global index-based ETFs like the iShares MSCI Emerging Markets ETF (NYSE: EEM) have to devote substantial weight to Saudi stocks in order to properly track their indexes.
Saudi Arabia-focused ETFs and index funds like the Franklin FTSE Saudi Arabia ETF (NYSE: FLSA) will also necessarily own shares of Aramco.
In summary, investors should be careful with international ETFs — especially those with substantial Saudi, Middle Eastern, or emerging market exposure — until Aramco’s valuation comes back down to Earth. Because sooner or later, it will.
Looking for another hot energy investment? One that’s actually, y’know, good? There’s a newsletter for that.
Energy Investor analyst Keith Kohl recently released a fascinating report about a set of obscure mid-stream energy stocks with above-average payouts.
Until next time,
Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.