Saudis look to cash out with your money

Having spent years watching the ins and outs of the financial markets, I have come to learn many things. One of them is, never trust IPOs.

For firms that have been built on the money raised by venture capitalists (VC) — investment banks, private equity firms, etc. — the entire point of building a company is to take it public and then the VCs cash in. Inflate the value and once it’s sold off to clamoring shareholders, the VCs could care less where the stock price goes, which is usually down.

For privately held firms that go public, it’s simply the way the ownership of the company cashes in.

The point here is, regular investors are left holding the bag. But don’t take it from me. A study done a couple years back by the University of Nebraska’s Center for Entrepreneurship looked at the 10-year survival rate of 1,000 companies that IPO’d since 1996.

A decade later, only 38 percent of the companies were still in business. And only 22 percent could be considered profitable… and this was when the economy was relatively pumped up on tech and mortgage-backed securities. Now, the numbers are likely even worse.

Now think about Saudi Arabia’s state-owned oil company, Saudi Aramco and a possible IPO.

Aramco was founded in 1933 when the U.S. and UK cut a deal with the House of Saud. The family got to run the country and its oil in exchange for protection from its neighbors.

It looks like the Saudis are planning on taking Saudi Aramco public for $2 trillion.

To lend some perspective as to just how massive that number is, let’s compare it to some of the biggest IPOs in modern history:

• The UPS IPO garnered the company around $6 billion.
• Google was valued at $26 billion.
• Facebook was $104 billion.
• Alibaba, the online Chinese juggernaut, got $231 billion for its initial share offering.

How much money is $2 trillion? It’s more than we have spent on a 13-year war in Iraq.

ExxonMobil’s market cap is only $370 billion by comparison. Is Aramco six times more valuable than the largest publicly traded oil company on the planet?

And why would the Saudis do it? Because they want to cash in. They can get paid now for the future of the oil. And they really need the cash.

Remember, oil prices crashed because the Saudis (Aramco) began overproducing to drive U.S. production firms out of business and to shutter supply from Russia.

Because Saudi wells are mature, they can produce cheaper than U.S. competitors. And given the fact that the global economy isn’t doing well, oil prices have stayed low.

But the Saudis have paid a bigger price than they expected. They got involved in a war in Yemen. And another in Syria. Domestic unemployment and religious and political unrest are growing. This all costs a lot of money to sort out and the Saudis aren’t making what they used to on a barrel of oil.

They need some big money to deal with their issues before it’s too late. And it may already be.

A friend of mine from South America once told me that the oil-rich Andean countries — Ecuador, Colombia, Venezuela — had a pattern of leadership. When oil prices rose, a ruling class leader was always replaced by a populist who would then give everything to his people. And it was possible because oil was making the state money.

But when oil prices would fall, the economy would collapse and a pro-business leader would take over.

Now, the current state of Saudi Arabia would be that it certainly qualifies as a state with a leadership that has been very magnanimous to some of its citizens. But now the economy is fraying at the seams and some very significant issues are causing problems, not only monetary but societal.

Bottom line: This Aramco IPO isn’t a sign of strength, it’s a sign of weakness and a desire to get out, grab the cash and leave investors to the machinations of the stock market.

This should make every energy consumer in the world nervous. The only thing worse than the Saudi Arabia we have now would be a Saudi Arabia in turmoil.

What’s more, it isn’t a foregone conclusion to say that if the House of Saud fell oil prices could skyrocket. More likely, because the markets don’t like uncertainty, they would gyrate wildly until there was some collective clarity.

U.S. oil won’t come on line to any significant degree until prices are back in the $60 a barrel range. But this collapse would be a good time to look to beaten down U.S. producers and also Big Oil. Big Oil could be the stabilizing force if this all comes to pass.

For now, we wait and see if the Saudis really do cash out.

— GS Early

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