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Goldman Sachs Aramco IPO valuation is insane

By Matein Khalid
I literally laughed when I heard that Goldman Sachs put a valuation range of $1.6 to $2.3 trillion on the Saudi Aramco IPO. One, a valuation range of $700 million only means the Goldie analyst bankers (deal promoters?) are clueless about what Saudi Aramco is really worth. Two, I cannot fathom how the financial markets will assign a valuation of 17 to 23 times earnings to a Saudi oil and gas producer whose sovereign owner has a 95% stake, total management control and whose chairman is the former head of the Saudi sovereign wealth fund PIF. Three, Saudi Aramco has to pay royalties to the Saudi government that can be as high as 80% of earnings if Brent rises to $100 a barrel. This means private investors can only expect yield, not real earnings growth, making this IPO a de facto preferred stock and thus Goldman’s valuation multiple range idiotic.

You do not exactly have to be Albert Einstein, Warren Buffett and George Soros to conclude that investors will not buy a state-owned oil supermajor at 17 – 23 times earnings when BP, say, is trading at 10 times earnings, a 6.8% dividend yield, has amazing earnings growth due to its asset sale/restructuring program and no state ownership, though I concede it began life as His Majesty’s UK Treasury owned Anglo Persian Oil Company a hundred years ago. This only proves that Wall Street investment bankers are bringing their inflated, rigged, self-serving, churn and burn games to the Gulf. There are solid reasons why Goldman was banned in Abu Dhabi and has to pay $7 billion to Malaysia after its Southeast Asia partner/bankster was indicted in New York for fraud and money laundering in the looting of the 1MDB sovereign wealth fund. Sad. Sad but true. This is an insult to the intelligence of every investor in the Gulf. Get real, Goldman. I was born at night, only not last night!

Bank of America Merrill Lynch has set a much more credible range of $1.2 to $1.3 trillion, not very different from my own $1 – $1.1 trillion or recommendation to buy the deal at a 7.4% dividend yield. I believe some investment banks use loony tunes inflated valuations to win mandates, not protect the interest of investors. After all, the Saudi government wanted a $2 trillion IPO even if it is obvious that the world’s fund managers would never buy the IPO at $2 trillion or at a 3.7% dividend yield.

So Goldman Sachs tells the world that Aramco’s “fair value” is $2.3 trillion. Sure, I know this game is ultimately spreadsheet macro juggling to pocket the mother of all banking fees from the kingdom but these games can cause billions of dollars in losses for retail investors. But then who really cares about the little guy at Death Star in Manhattan? But I do, since I have a conscience and not a billion dollar partner’s bonus pool. Human beings are humans first and investors second even if we happen to live in the Gulf and not Manhattan, though I was once an East Village boy who plied my wares on Wall Street.

The crème de la crème of global finance – J.P. Morgan Chase (my alma mater in the 1990’s), Morgan Stanley, Citigroup, HSBC and Credit Suisse are on top of the syndicate tombstone in the world’s (actually history’s) biggest stock market flotation.

The real fate of the Saudi Aramco IPO deal will be decided not by a 1% sale on the Tadawul but after the global institutional roadshows take place from Boston to Tokyo, Zurich to San Fran. For now, we do not even know how much of the company the Saudi government intends to sell in the IPO, let alone how much money it seeks to raise from the global capital markets.

This is not the optimal moment to raise money for a Middle East state owned energy colossus, especially one whose free float will be a mere 5% on the stock exchange. Oil and gas has been the worst performing sector for 2019 and the worst performing sector for the past decade.

Iran has sabotaged oil tankers and even shot down a Pentagon surveillance drone in the Gulf of Oman and Strait of Hormuz. The Houthi rebels in Yemen claimed responsibility for a missile/drone attack on Saudi Aramco’s oil hubs in Abquiq and Khurais. Anti-regime protests have erupted in Algeria, Sudan, Lebanon, Syria (the protests broke out in 2011, destroyed the country and led to 600,000 deaths. What a pity, what a world) and now Iraq. Turkey has just invaded the Kurdish enclave in Syria and done a deal with the Kremlin to replace Trump’s cut and run Pax Americana in the Middle East. Is this the best of times or the worst of times for global fund managers to be pitched on an emerging markets/Saudi state-owned IPO? Some global financiers are smoking something weird in their philosopher’s pipe – and it is definitely not Marlboro Lights.

Valuations in oil companies have plummeted this entire past decade as climate change and electric cars have surged as dominant themes. Frankly, I view Big Oil as Big Tobacco – a pure dividend yield play (6.8% on BP, is a bit more than my Home for Scottish Bank Clerks (HSBC) Premier bank deposit pays). The Royal Shakespeare Company even dropped BP as a sponsor since the young view Big Oil as immoral and a contributor to climate change. My own Gen Z twins do not want me to invest in fossil fuels in their names.

The macro outlook for the global economy and the oil market is not mixed but downright awful. $15 trillion in government debt in Europe and Asia still offers negative yields. Brent has fallen 70% since its $148 peak in July 2008, the Stone Age of global finance. But as a caveman of Stone Age finance, I traded Brent at $148 a barrel and I also traded its ghastly plunge to $9 a barrel in 2000. Will Saudi Aramco pay a $75 billion dividend if Brent plunges again to $30, as one of the world’s top oil and gas economists told me could happen when US shale output is 16 million barrels a day by 2024. Please. If you believe this will happen, would you buy the Brooklyn Bridge from me – I will throw in Blackfrairs Bridge in London and my beloved Ponte Veccio in Florence free for you.

I am not dissing Goldman Sachs – maybe their bankers are really most optimistic dudes and dudettes on Planet Money and really do believe the Saudi Aramco deal will be valued at $2.3 trillion in the public markets. Yet Goldman Sachs bankers get paid on mandates and transactions (financial advisors are like doctors who give you free consultation but get a cut out of every pill and lab test they prescribe – that happens all the time in the Gulf too).

I am a buy-side investor who commits money in global markets for my relatives, friends/clients and myself. I have to live with the results of my decisions and their impact on the lives of people I love, unlike Goldman’s oil analysts/oracles. I remember when their top oil strategist forecasted $250 a barrel Brent “superspike price” at a London conference I attended in early 2008. I gagged on my sushi. Oil ended 2008 below $40. Money talks everywhere, but money screams at a decibel count heard all over the world at Goldman’s Mount Olympus in Manhattan and human values mean squat. I am ashamed I chose capital markets as a career and, yes, I too was seduced by the money Wall Street dangled before me after Wharton. BTW, Goldman I-bankers calculated that WeWork was worth $65 billion six months ago to curry favor with Softbank’s Masa Son. WeWork is now worth $8 billion after an aborted IPO and Masa-san just apologized for losing $4.6 billion for his shareholders on WeWork. Thankfully, he did not commit hara-kiri on CNBC. Ultimately, the world’s fund managers will decide the valuation of the Saudi Aramco IPO. That much, at least, is certain.


Also published on Medium.