In about a year, Saudi Arabia is going to unleash the largest IPO in the world - ultimately transforming the entire energy investing landscape.
Make no mistake, the sale of a 5% position in oil giant Aramco will be a once-in-a-generation opportunity.
That's why, as the market moves toward this historic placement, it is something we're going to continue to follow closely here.
With the countdown clock to the deadline starting to wind down, today I'm going to sketch out everything my sources are telling me about this colossal IPO.
And then I'll show you how we're going to play it.
But first, you need to understand what this IPO means...
Saudi Arabia's "Next Move"
After the IPO, the Saudis will continue to control 95% of Aramco.
The overall value of both the placement and the company at large will be based on the market price of oil in the ground.
It also means the Saudis will have to provide transparent reserve figures, which has been a recurring concern since 1979.
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In that year, Saudi Arabia took over control of Aramco from a consortium of American companies.
That is also the last time there were any official figures on how much extractable crude oil was in the fields.
This is the "next Saudi move" in the IPO.
We will be moving into high gear once Aramco announces an independent third-party specialist to assess oil reserves, conditions of major reservoirs, and extraction potential.
This is where the IPO has "meat put on its bones."
Riyadh obviously wants as high a price for the IPO as possible.
However, that requires they release detailed reserve figures and projections.
In this sense, they are no different than any operating company floating shares.
The price an investor is prepared to pay is dependent on the market value of known extractable reserves, not on what is actually sold into the market on any given day.
But here is the crucial piece of information you need to understand...
This IPO will introduce a very different investment strategy that will transform perspectives and expectations as we have known them...
The Real Game Changer
As I've mentioned previously at Oil & Energy Investor, the real game changer is what the IPO proceeds will be used for.
The Saudis intend to diversify their domestic economy and wean themselves from being a rentier state dependent on selling oil.
But that diversification will come from a unique approach.
Rather than based primarily on moving non-oil industry into Saudi Arabia, the diversification will unfold by acquiring non-oil assets someplace else.
Let that sink in for a moment.
The objective will be to diversify the revenue flow, with the sources of that revenue both external and in broad sectors of the market.
Consider this: The model for such an approach already exists.
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The Norwegian is the best-known sovereign wealth fund (SWF) in the world, and the oldest.
It utilizes revenue from the sale of oil and natural gas, is set up to finance the country's ambitious social welfare program, and provides a fiscal buffer for the central budget in the event of a decline in oil and gas market prices.
But it is a further aspect of Norway's fund that parallels Saudi Arabia's intentions the most.
The Largest SWF the World Has Ever Seen
As of the fourth quarter of 2017, it has invested in 1.5% of all equity stocks publicly traded on all exchanges worldwide.
Each SWF, especially those based on natural resource sales (oil, natural gas, precious and other metals, etc.) has to be concerned with repatriating currency from sales.
In a phenomenon understood since David Hume in the late 18th century, returning hard currency (or gold and silver in Hume's time) from foreign trade inflates the domestic currency and distorts the economy.
Hume called it the "price-specie flow mechanism."
The capital influx increases the domestic money supply, thereby raising the prices of a country's exports.
This price rise, in turn, cuts into any balance of payments surplus. Therefore, any attempt to have a permanent surplus is self-defeating in practice.
A more recent postscript to this is directly aimed at petrol-trading countries. Aimed at the aftermath following the discovery of substantial North Sea natural gas off of the Netherlands, it has become the modern version of Hume's discovery.
Anything that ends up providing an appreciable increase in foreign hard currency into an economy will translate into...
- Currency appreciation;
- Reducing the competitiveness of other (in our case, non-oil or gas) national commodities;
- Localized inflation (especially in those sectors of the economy having the least connection to the one providing the currency influx);
- And will mitigate against domestic diversification by encouraging the movement of non-resource-dependent industry to less expensive locations.
In short, unless the new money is segregated from the domestic economy, it will have a major negative impact.
For this reason, SWFs, especially from oil-producing states, invest abroad and tightly control the repatriation of investment proceeds back home.
Once leverage is done, the Saudi investment fund created around the Aramco IPO will be the largest SWF the world has ever seen.
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As has been the case with other SWFs, it needs to invest abroad to avoid producing significant inflation domestically.
Of course, Aramco has had to wrestle with this concern for years.
The huge influx of funds arising from the Aramco IPO, however, will be like putting this problem on steroids.
That's why I know that it is going to transform how we evaluate what an "energy" investment is.
The base of this huge new SWF will be the value of Aramco's oil.
That's the energy part.
But the investments that happen as a result will be global and will be in virtually every sector of the traded markets.
A mammoth Saudi oil-based investment vehicle is going to be moving into everything from technology to recreation, consumer goods to real estate, and chemicals to industrial production.
With some traditional energy, renewables, efficiency, and field technology thrown in for good measure.
For you, I'm going to be leveraging my global network to find out early indications of where that Saudi money will be moving so we can target publicly traded companies on the Saudi's acquisition "hit list."
This is unlike any other energy investment strategy... ever.
And I hope you are as excited as I am to jump right in.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.