PORTLAND
MARKET
REPORT
January update
Millwall FC and Saudi Aramco would seem, on
the surface, to have little in common. But in
many ways, the favoured New Den chant of
“no-one likes us, we don’t care”, could just as
easily be applied to the state oil company of
Saudi Arabia…or indeed the oil industry as a
whole!
On the back of Saudi Aramco’s recent Initial
Public Offering (IPO), some commentators
expressed surprise that there should be
widespread investor interest in a company that
not only produces the least popular product
on the planet, but also a product whose future
is constantly being called into question. Add
to that the fact that Aramco operates in a
dictatorship with an opaque judiciary and the
ever-present threat of revolution, and many are
scratching their heads in disbelief.
‘WIDESPREAD INVESTOR
INTEREST IN A COMPANY
THAT PRODUCES
THE LEAST POPULAR
PRODUCT ON THE
PLANET’
Such a view however overlooks the mighty
scale of the oil industry, the breath-taking
profitability of Aramco and the confidence
of the Saudi Royal Family in backing the
company’s resilience in the face of a future
decline in demand. First and foremost, the
oil industry is still comfortably the biggest in
the world and even if it was to halve in size,
it would still be larger than (for example) the
collective global metals market (iron, steel,
gold, aluminium etc). As for Aramco itself,
the company is the most profitable on earth
by a factor of 2 to 3 times, outgunning the
combined profitability of ExxonMobil, JP
Morgan, Alphabet (Google) and Facebook.
In the first 9 months of 2019 (when oil prices
have been fairly flat), Saudi Aramco delivered
profits of $68bn. Its nearest rival was Apple,
which in the same period “only” made $35bn.
The world may desire electrical fruit, but it
would seem it needs filthy oil more.
Investors were well aware of these facts
and interest in Aramco’s share offering was
correspondingly intense, with an incredible 25
Investment Banks involved in the process. In
“crude” terms, when it comes to a company like
Aramco, money talks and investors are rarely
sentimental when it comes to hard returns.
THE OIL INDUSTRY IS
STILL THE BIGGEST IN
THE WORLD
But there is more to Aramco than its
current staggering ability to make money and
the floatation by the Saudis is both shrewd
and bold. Yes, it is true that oil may be on
the “last lap” of the global energy race, but
in so many areas, it remains, and will remain
indispensable. Cars, buses and maybe trucks
can all shift to alternative power sources, but
planes and ships cannot do so easily. Plastics,
chemicals, fertilisers and pharmaceuticals
all have few alternatives to the intense use
of oil. More significant still is the fact that as
demand for oil declines, so will investment
in oil exploration, which will leave gaping
holes in the relationship between supply and
demand. Whereas demand moves in a linear
and entirely predictable fashion, oil supply will
disappear in “chunks”, as oil companies cease
investing in new projects. This will result in large
and damaging price spikes, which will of course
massively benefit the producers that keep
investing and producing…
Step forward Saudi Aramco! In a “last-man
standing” scenario, all sensible bets would have
to be on Aramco. At an average oil extraction
cost of $5-10 per barrel, it is unlikely their
operations will ever be unprofitable – whatever
the oil price. And when there are price spikes
along the way, bumper dividends will be
generated for shareholders. Furthermore, low
extraction costs are a reflection of the low
energy required to get Saudi oil out the ground,
which actually makes Aramco’s operations
highly efficient and environmentally friendly
versus the likes of Russian heavy crude or
even American shale. In an environmentally
conscious future, this kind of “green” factor
could be extremely important to “necessary”
buyers of crude.
All of which means that whilst the
Oil Majors – see also page 21 – are now
desperately trying to reinvent themselves as
Energy Companies (with renewable solutions
thrown into the mix), Aramco has no real
reason to do anything but get the stuff out the
ground and sit tight. All the while, competitors
will likely fall by the wayside, picked off by
shrinking demand, high production costs and
aggressive environmental legislation. The
$2trn valuation in December made Aramco
the world’s biggest company by market
capitalization (easily surpassing Apple’s current
value of $1.15trn) and even though only
2-3% of shares were made available, they still
generated $30bn for the Saudi Treasury. Much
more will no doubt follow, when further shares
are released this year.
Readers can make their own judgements
as to whether the Saudi Royal Family showed
far sighted judgement with their IPO or
whether they are simply the lucky rulers of a
country blessed with bounteous oil reserves,
that are located in geologically basic rock
formations. Either way, Saudi Aramco’s share
offering allows us to cast a light on what the oil
sector might look like in 20 years’ time, when
demand has fallen, and alternative forms of
energy are in the ascendancy. One conclusion
might be that the industry in 2040 will be
made up of multiple small players serving
the niche products that still come from crude
oil. Crown Prince bin Salman is banking on
an alternative view, where one giant player
dominates what is left of the oil industry. Based
on December’s flotation, it would seem that
investors believe that the player in question will
be Saudi Aramco.
For more pricing
information, see
page 22
Portland Fuel Price Protection
www.portland-fuel-price-protection.com
Fuel Oil News | January 2020 13