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There's a Dark Side to Zero-Cost Investing That Can't Be Ignored Bloomberg
Saudi Arabia formally began an initial public offering Sunday of a sliver of oil giant Saudi Aramco after years of delay, hoping international and local investors will pay billions of dollars for a stake in the kingdom's crown jewels.
An approval by Saudi Arabia's Capital Market Authority served as the starting gun for an IPO promised by Crown Prince Mohammed bin Salman since 2016. But unlike traditional IPOs, Saudi Aramco offered no hoped-for price range for its shares nor any idea how much of the firm would be offered to investors on Riyadh's Tadawul stock exchange.
Analysts say the kingdom likely hopes local investors will push its share prices toward a desired $2 trillion US valuation and buoy that price ahead of any possible further listing abroad. Saudi Aramco also made a point in its filings to highlight its profitability and low costs through newly released data once held as a state secret by the Al Saud royal family, euphemistically referred to by the company as its "current shareholder."
However, economic worries, the trade war between China and the U.S. and increased crude oil production by the U.S. has depressed energy prices. A Sept. 14 attack on the heart of Saudi Aramco already spooked some investors, with one ratings company already downgrading the oil giant.
"We want to share the Aramco shares with the citizens of Saudi Arabia," said Yasir al-Rumayyan, the governor of Saudi Arabia's Public Investment Fund. "We want to get financial investors from all over the world."
It's hard to overstate the power of the oil firm, known formally as the Saudi Arabian Oil Co. It produces over 10 million barrels of crude oil a day, some 10 per cent of global demand. The firm's net income in 2018 was $111.1 billion, far beyond the combined net income of oil giants BP PLC, Chevron Corp., Exxon Mobil Corp., Royal Dutch Shell PLC and Total SA.
Sources say Aramco could offer one to two per cent of its shares on the local bourse, raising as much as $20 billion to $40 billion US. A deal over $25 billion US would top the
record-breaking one of Chinese e-commerce giant Alibaba in 2014.
Saudi Arabia's oil sits close to the surface in large pools, making it far cheaper to extract. Saudi Aramco also has proven liquid reserves of 226.8 billion barrels, the largest of any company in the world and "approximately five times larger" than those held by the five oil giants, according to the firm's IPO documents.
That's led to a clamouring from investors for Saudi Aramco stock since Prince Mohammed announced plans in 2016 for a two-phase IPO of 5 per cent of the firm in the kingdom and abroad. The prince hopes to raise some $100 billion from investors, which will be funnelled into the kingdom's PIF sovereign wealth fund for projects to boost employment and major development projects.
"I believe it is in the interest of the Saudi market, and it is in the interest of Aramco," Prince Mohammed told the Economist magazine in 2016 in announcing his plans.
But the planned IPO saw years of delays over valuation concerns and where to list it abroad. Oil prices, once over $100 US a barrel, crashed in 2014 to under $30 a barrel. Benchmark Brent crude now trades around $60 a barrel, pushed up by a production cut by OPEC countries like Saudi Arabia and those outside of the cartel like Russia. Those cuts have limited Saudi production, in turn pushing up its estimated government budget deficit for next year to nearly $50 billion.
The announcement by the Capital Market Authority offered no timeline, share price or percentage of the company to be offered in the IPO, nor did officials or documents later released by Aramco. Both al-Rumayyan and Saudi Aramco CEO and President Amin H. Nasser also declined to say whether an international listing would still happen as well when addressing journalists in Dhahran in eastern Saudi Arabia, the city that hosts Saudi Aramco's headquarters.
"Usually when you go for an IPO, you have a target price," said Capt. Ranjith Raja, an oil analyst at data firm Refinitiv. "There's still no clarity in what they're trying to look at."
Based on that, Saudi Arabia may choose to rely on local investors to push up the price of the stock, Raja said.
The Saudi-owned satellite channel Al-Arabiya reported last week, citing anonymous sources, that pricing for the stock will begin Nov. 17. A final price for the stock will be set Dec. 4, with shares then beginning to be traded on the Tadawul on Dec. 11, the channel reported. The channel is believed to have close links to the kingdom's Al Saud royal family and correctly identified Sunday as the IPO's launch.
Analysts say a $2 trillion US valuation — Apple and Microsoft separately for instance are $1 trillion — may be a stretch. By announcing the start of the IPO on Sunday, Prince Mohammed may have been convinced to take a lower valuation in order to get the IPO moving.
Saudi Aramco has sought to assure investors, given the questions over its valuation and the potential hazards of future attacks or geopolitical risk. A presentation posted to Aramco's website last month announced the intent to offer a $75 billion dividend for investors in 2020. That's the payment per share that a corporation distributes to its stockholders as their return on the money they have invested in its stock.
It also pledged that some 2020 through 2024, any year with a dividend under $75 billion would see "non-government shareholders" prioritized to get paid.
But beyond the stocks, worries persist that Saudi Arabia could be hit by another attack like the one Sept. 14, which temporarily halved its production. The U.S. blames the attack on Iran. Tehran denies it launched the cruise missiles and drones used in the assault. Yemen's Houthi rebels claimed responsibility, but analysts say the weapons used wouldn't have the range to reach their targets from Houthi-controlled areas of Yemen.
Responding to a journalist's question about the safety of an Aramco investment, al-Rumayyan spoke about how quickly the company restored production after the attack.
"The oil traders, they saw this as a nonevent, and that means it is really safe," he said. "That's what the money is saying."
It's a match made in data heaven.
After days of rumors, Google announced Friday that it would be acquiring wearables pioneer FitBit for $2.1 billion. In an industry where warring tech giants are battling for user loyalty, it's a big deal.
"It's not every day a deal like this happens," Forrester analyst Frank Gillett told Mashable over the phone.
The acquisition could have far-reaching ripples in business, showing that Google is seriously ready to compete with Apple in health and wearables, and up its presence in our lives wherever we go. But, if you're a FitBit user, what does it mean for you?
Overall, experts agree that change will come, but it will take a while.
"It is a big deal to bring together two technology stacks that were built separately without plans to integrate," Gillett said. "We won’t see the full fusion for two or three years. This will be slow."
But slow does not mean everything will stay the same forever. Taking many cues from Google's acquisition and (slow) integration of Nest, here are the changes experts think Google's absorption of wearables pioneer FitBit could bring about.
If you're a FitBit user, it might get a bit more convenient to also use Google products. For example, perhaps it will be easier to use Maps or Calendar than other similar products. As another example, Gartner analyst Werner Goertz said perhaps Nest could use location data from FitBit to adjust the temperature or energy output if it determines you're out of town.
"Integration into an overall Android ecosystem creates additional synergies," Goertz said. "That can be beneficial to Google, as well as end users."
Right now, FitBit's smart watch, the Versa 2, comes equipped with Amazon's Alexa smart assistant. The thing is, Google has its own, competing A.I.: Google Assistant.
Experts don't think the Google acquisition means FitBit will ditch Alexa entirely. Instead, Google is likely to integrate Google Assistant and offer users a choice of which smart assistant they want to use.
"If FitBit devices are merged into the Google Assistant ecosystem, there will be the tendency for the system to favor Google ecosystems," Goertz said. "But I don’t think Alexa will be going away entirely, because they want to give users the choice."
One of the reasons FitBit has lagged behind Apple in smart watches was because it started with a low-cost, simple fitness tracker, which it then had to rejigger into a more complicated device. You can expect Google to come in and find a way to keep the accessibility of FitBit (in terms of price and simplicity), but up its technological capabilities.
Google said in its acquisition announcement that your FitBit health data will not be used for advertising purposes. However, that doesn't mean it won't be used to pad Google's bottom line.
One of the big ways it will do that is by using FitBit's enterprise business, in which it has third parties analyze aggregated, anonymous user health data for employers and insurance companies.
"[FitBit has] a bigger integration into enterprise uses than anybody else," Goertz said. "That’s an asset that I think Google will capitalize on."
In addition to this aggregated data, integrating FitBit into Google is all about getting to know customers even more deeply, with the sort of personalized data that a wearable provides (like location, or whether you're someone who uses a FitBit regularly).
"This is not a race against Apple’s smart watch — this is an ecosystem play," Goertz said. "It’s more about the data, and developing customer intimacy."
Eventually, Google may roll out more information about how it collects your data with FitBit (as it did with Nest).
"Like Nest, Fitbit didn’t have an unusual focus or attention on data," Gillet said. "But they will now."
Last minute talks between the union representing Metro Vancouver’s bus and SeaBus workers and TransLink subsidiary Coast Mountain Bus Company (CMBC) fell apart yesterday, failing to thwart the first labour action on the region’s public transit system in nearly two decades.
The initial conduct of the labour action, beginning today, is relatively modest compared to the months-long shutdown transit riders endured in 2001.
Unifor announced yesterday its labour action starts with a uniform ban by transit operators and an overtime ban by maintenance workers, with the accumulation of unmet maintenance hours resulting in a gradual increase in pressure on the transit system.
If both parties are unable to come to an agreement over the coming days, weeks, or even months (if history repeats itself), this could quickly lead to fewer buses on the road and a possible impact on SeaBus service.
The union asserts its members, particularly the frontline workers, specifically bus drivers, are feeling the direct brunt of the public transit system’s growing pains.
Overall ridership is up by 18% between 2016 and 2018, and overcrowding increased by 36% over the same period, creating a stressful and demand work environment that is exacerbated by “a serious understaffing issue.” Bus delays as a result of rising traffic congestion, for instance, have been cutting away at the designated break times bus drivers have for eating and going to the washroom.
Unifor has been negotiating for a corresponding increase in wages, benefits, and working conditions for 5,000 members.
Sources told Daily Hive on Thursday the counter proposal by CMBC of wage and benefit increases, as well as improved working conditions, is as follows:
To put this in real terms, conventional bus drivers currently earn $32.61 per hour after 24 months of employment. With CMBC’s proposed wage increases, conventional bus drivers would reach $35.74 per hour after staggered increases over the next four years.
CMBC is also spending tens of millions of dollars more to hire more bus drivers, increase bus services, and introduce new routes. Between now and 2021, it plans to hire an additional 1,300 bus drivers, with much of the workforce expansion intended to address understaffing concerns.
Daily Hive was unable to obtain Unifor’s proposal, but given the rejection it goes without saying that it was obviously greater than what CMBC was willing to offer.
Negotiators for CMBC maintain they are seeking fiscal responsibility, choosing to focus tax dollars on much-needed expansions and improvements to services. They believe their proposal is fair and reasonable, addressing the outstanding issues to a level that exceeds most other public sector settlements with unions in the province.
CMBC asserts meeting Unifor’s level of demands would result in added operating costs of tens of millions of dollars annually, and it could threaten components of the Mayors’ Council’s 10-year plan of improving and expanding transit service levels — including hiring more bus drivers — amidst quickly growing ridership.
The expanded workforce over the coming years would be in addition to the over 1,000 new bus drivers hired over the last two years.
Until further notice, the public transit authority is asking transit riders to allow for extra time to reach their destinations. It is unknown when both sides will meet again at the table and resume negotiations.
The West Vancouver Blue Bus, all three SkyTrain lines, the West Coast Express, and HandyDART services are unaffected by the labour action.
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LONDON — Saudi Arabia said on Sunday that it had approved plans for the giant state-owned oil producer, Saudi Aramco, to go public, taking the country’s crown jewel and what is probably the world’s most profitable enterprise close to its long-awaited goal: becoming a publicly traded company.
The country’s Capital Market Authority said that Aramco planned to sell an unspecified percentage of its shares, which are expected to begin trading next month. Bankers on the transaction have told the Saudi government that investors are likely to value the company at about $1.5 trillion, people briefed on the matter said previously.
Aramco is the behemoth in the oil business, alone producing about one-tenth of the world’s output. Last year, it made $111 billion in net income, almost twice Apple’s profit and many times the earnings of lesser rivals like Exxon Mobil and Royal Dutch Shell.
And Sunday’s announcement sets up what may be the biggest initial public offering ever, with a chance to exceed the nearly $22 billion that Alibaba, the Chinese e-commerce giant, raised in one day in 2014.
But Aramco’s initial public offering will fall short of Saudi Arabia’s audacious goals.
When Mohammed bin Salman, the country’s de facto ruler, first announced plans to take the company public in 2016, he said that the company would be valued at about $2 trillion, that the offering would take place by 2017 and that its shares would trade on both a premier international stock exchange, such as New York, London or Hong Kong, as well as the Saudi exchange in Riyadh.
Yet Aramco appears poised to be valued well short of $2 trillion. And its I.P.O. process has proceeded in fits and starts over the past three years, pausing several times over the complications of readying its finances and operations — long shrouded in secrecy, even as it gushed wealth for its kingdom — for the scrutiny of public investors.
And while Prince Mohammed, the country’s crown prince, had been eager to have Aramco trade on both the Tadawul, the local stock market, and a more prominent stock market, that appears off the table for the time being.
At last week’s investor conference at the Ritz-Carlton Hotel in Riyadh, Saudi officials made clear that the crown prince’s thinking was critical to the I.P.O.
The prince’s older half brother, Prince Abdulaziz bin Salman, who was recently appointed energy minister, told the conference on Wednesday that the listing would be “a Saudi decision first of all and, specifically, Prince Mohammed’s decision.”
Much of the proceeds from the offering are not likely to flow to Aramco’s operations but into the Public Investment Fund, a Saudi sovereign wealth fund that is evolving into the prince’s main vehicle for shifting the country’s economy away from its reliance on oil.
Along with venture capital investments like Uber, the ride-sharing service that has a strong presence in the kingdom, the Public Investment Fund is putting money into renewable energy and enormous real estate projects aimed at creating jobs for Saudis. Neom, a vast futuristic city planned for the northwest of the country, will require $500 billion from the Public Investment Fund and other investors over time, according to its website.
On Wednesday, the fund announced that it was borrowing $10 billion from a group of international banks, including JPMorgan, Citigroup and Bank of America. The loan would help “accelerate” the fund’s investment program, according to a news release.
It is not hard to see why the prince is pressing for quicker results fueled by an Aramco share sale. The economy has yet to see big payoffs from his schemes. Unemployment among Saudi nationals remains elevated at 12.7 percent.
What remains indisputable is how big Aramco is. It earned $46.9 billion in the first half of the year and produced 10 million barrels a day, giving it a financial and production heft that analysts have said would lure in international investors.
Still, questions are likely to dog Aramco executives and their army of advisers as they continue to pitch prospective investors on the offering. Some will center on how the company has recovered from a devastating drone and missile attack in September that temporarily shut down half of its production.
The physical damage may have been largely repaired, but investors will probably remain worried that its facilities remain vulnerable to another assault, given the political tensions between Saudi Arabia and its neighbors.
“There is a risk of further attacks on Saudi Arabia, which could result in economic damage,” said Fitch Ratings in September when it downgraded Saudi Arabia’s credit rating to A, from A+.
Investment in Saudi Arabia has generally been tempered by the killing and dismemberment of the Saudi dissident and journalist Jamal Khashoggi by Saudi agents last year. Prince Mohammed has accepted responsibility for the killing, but denied ordering it. Those concerns, though, were hard to find at last week’s investment conference, where Wall Street executives and world leaders converged.
Aramco’s status as the world’s mightiest oil company comes as concerns about climate change have raised doubt about the future of fossil fuels. Top institutional investors like the Singaporean sovereign wealth fund Temasek have already suggested they will reduce their exposure to fossil fuels, potentially ruling them out as backers of Aramco.
Aramco officials are addressing those concerns by putting around $600 million a year into research and development in areas like more efficient car engines and vehicles equipped with devices for capturing much of the carbon dioxide emissions that they produce.
The company is also investing in plants and joint ventures aimed at funneling more of its oil into chemicals, which Aramco’s leadership believes will see relatively strong growth in the coming decades, when demand for transportation fuels may fall off as alternatives like electric vehicles become more available.
“The pessimism around oil is misplaced,” Aramco’s chief technology officer, Ahmad Al Khowaiter, said in a recent interview at the company’s headquarters in Dhahran. “The growth is in materials; it is in chemicals,” he added.
Michael de la Merced reported from London, and Stanley Reed from Riyadh.
