Saudi Aramco (Saudi Arabian Oil Company) is one of the largest companies in the world by revenue, and the most profitable company in the world.

It has both the world’s second-largest proven crude oil reserves, at more than 270 billion barrels, and second-largest daily oil production.

Aramco announced on 3 November 2019 its plan to list 1.5% of its value as an IPO on the Tadawul stock exchange, and trading commenced on 11 December 2019.

Within its first week of trading, prices surged and the company became worth $2.1 trillion dollars, surpassing Apple. This made it the most ‘valuable’ company of the world.


Looking at the hourly chart of Saudi Aramco over the past few days, we saw that it gapped up strongly for the first 2 days, then gave up about half the gains. Prices seem to have stabilised, and currently it is up about 10% from the IPO price.

After the initial hype and euphoria, how sustainable is the uptrend, and is it a good long-term investment? What are some of the key risks?

 

Key Advantages

According to the summary prospectus, Aramco intends to pay out an incredible $75 billion in cash dividends next year. This is a potential 5% yield per share, which is almost 30 times more than the $2.6 billion Apple distributed to investors in 2018.

As for production, it has the world’s largest oil reserves for any one company, and its cost for extracting the lowest at $2.80 per barrel, far less than any of its rivals.

 

 

Not to mention it has the second largest oil reserves in the world, which means it can affect oil prices.

 

 

The IPO also comes just a few months after Saudi Arabian stocks were finally included on the MSCI Emerging Markets Index, giving a greater number of global investors exposure to the oil-rich kingdom.

 

Key Risks

The company is owned by the sovereign wealth fund of Saudi Arabia, which is using the IPO to raise more funds to diversify its investments and wean its economy off oil according to its 2030 vision plan.

However, there are strong indications that a bubble will grow around Aramco shares as reports come out that some Saudis are going to extreme lengths to invest in this stock, seeing how this is the only opportunity for all Saudis to have a direct stake in the kingdom’s crown jewel.

As a foreign investor, it is not easy to invest, because the shares will only be available to buy on the Tadawul Exchange in Riyadh, and dividends are also paid out in the local currency.

In addition, the public float is only around 1.5%, making this a relatively small public debut for such a massive company.

The rest of the shares will be owned by the crown prince and the House of Saud, which is an absolute monarchy, so global investors should not expect to have any shareholder rights. Aramco’s board of directors will have a fiduciary duty not to investors but to MBS and any future monarch. This has some serious implications.

On 14 September 2019, there was a drone attack on two Saudi Aramco plants. The attack cut 5.7 million barrels per day (bpd) of Saudi crude output, over 5 percent of the world’s supply. There could be a risk of more future attacks.

Saudis who invest in the IPO are incentivized to hold onto their shares for at least six months under a program that will grant them an extra share for every ten they own for the entirety of that period. That means many Saudi retail investors will not sell until then. Moreover, wealthy Saudis, Saudi businesses and Saudi financial institutions have been asked by the government to invest. They, too, will be discouraged from selling quickly.

This means that once the six months are up, which is around June next year, we could see selling frenzy, leading to a bursting of any bubble that might have built up.

Lastly, government officials have long indicated that the government will sell more shares after the IPO. It may list more shares on an international exchange, or it may sell additional shares on the Tadawul exchange. This will have a negative impact on existing share prices.

 

Another Key Factor

According to reports, Aramco’s growth assumptions and basis for such a generous dividend package are predicated on Brent crude prices at or above $65 a barrel, which I have indicated with the blue line on the chart below.

Looking at this weekly chart of Brent Crude oil, it is hard to predict which way it will head in the long-run, especially with the new developments in alternative energy sources.

 

Conclusion

In summary, this company has an obvious competitive advantage which gives it unrivaled margins and profits, however the key question is whether the interests of the company and the minority shareholders are aligned.

In addition, the stock price is likely to be very sensitive to oil prices, which can fluctuate widely.

Personally, I will wait for 6 months later to see what price the stock stabilizes at after the selling, and whether a bubble will form in the meantime.

I just got back from one month of travelling in Eastern Europe, and I’m glad to see some progress on the trade war resolution.

The US and China finally agreed on Phase One of the trade deal on Friday (Dec 13), including immediate cuts on import tariffs.

This is good news for Trump who is now battling impeachment, and with his 2020 reelection campaign coming up, he needs to give voters some small wins.

If this deal was not reached, a new round of tariffs on consumer electronics like cell phones and computers would have kicked in on Sunday.

As a sweetener, the US will also slash in half the 15% tariffs imposed on US$120 billion of Chinese goods that were imposed on Sep 1 previously.

However, existing tariffs of 25% on US$250 billion of Chinese imports would stay in place pending further negotiations on a second phase deal.

In return, China is committing to increasing purchases in four sectors: Agriculture, manufacturing, energy, and services.

In a sign that tensions remain high, Foreign Minister Wang Yi accused the US of “suppressing” China in a number of fields, including the economy, trade and technology and had “seriously damaged the foundation of hard-earned trust between China and the US.”

The US also angered Beijing by backing Hong Kong’s pro-democracy movement and criticising China’s mass detention of mostly Muslim minorities in the northwest region of Xinjiang.

Looking at the chart of the S&P 500, stocks have continued to climb even during the trade war, which shows that the uptrend is still very strong.

Now that we are at the top of the trend channel, we might see some correction to the middle or bottom of the channel.

If there are no major political surprises or escalation of the trade war, then we might even see a Christmas rally before the year end.

Overall, I would be looking to invest in high growth US stocks.

In the news, U.S. and Chinese officials are “close to finalizing” some parts of a trade agreement after high-level telephone discussions on Friday, the U.S. Trade Representative’s office and China’s Commerce Ministry said.

This seems to bode well for the stock market, with prices already creeping up to test the prior highs.

So will we see new highs? And how bullish are these new highs?

Unless there is a drastic turn of events, I am pretty confident we will see new highs.

However, the question of how sustainable these new highs are are more difficult to answer.

For example, there are other factors to consider, such as whether both sides stick to the agreement and the trade war does not escalate again.

There is also the Trump impeachment which is going on.

And there is also the softening of the US economy, which will also affect markets negatively.

So it is a matter of balancing the positive and negative catalysts, and deciding which are more important in the short-run and long-run.

Unfortunately, I am not seeing many long-term positive catalysts.

Yesterday, we saw an incredible spike in Bitcoin of close to $2500, which is 40+% move.

Even though price has corrected slightly, it is currently still up by about 30% from its recent lows.

Although no one really knows the reason for such a sudden move, many people have attributed it to remarks by the Chinese President, Xi Jinping, who said the country needs to “seize the opportunity” afforded by blockchain technology.

Speaking as part of the 18th collective study of the Political Bureau of the Central Committee on Thursday in Beijing,  he said that blockchain technology has a wide array of applications within China, listing topics ranging from financing businesses to mass transit and poverty alleviation.

Although he was talking about Blockchain technology rather than cryptocurrencies, traders seem to have felt that it would still have a positive effect, at least based on what the market is reflecting.

For a technical perspective, the chart is starting to look more bullish medium/long-term, with the breakout of the falling wedge pattern.

Tesla recently posted a cash balance increase to $5.3 billion and reported a profit of $1.86 per share, shattering analyst expectations for a loss of 42 cents per share.

Elon Musk promised a 2020 rollout of a cheaper SUV and more self-driving technology to stay ahead of larger rivals rushing into the premium electric vehicle market he created.

 

 

Looking at the chart of Tesla, we can see that it traded between the range of $250-$390 for almost 2 years (mid 2017 to mid 2019), before breaking to test a major support level at $180.

From there, it has made a strong recovery, with a whooping 70% gain from its June 2019 bottom.

Now, prices are close to $300, and it looks poised to test the highs of $390 again.

I will continue to hold and look for opportunities to accumulate more again.