A leak in the pipe?

There are certain principles and pearls of wisdom that newbies and experienced professionals alike adhere to within almost every profession. They often turn out to be true and, thus, provide useful guidance within that professional field. In the realm of finance journalism, there is one major principle that we often reiterate: "If media is excessively reporting about a certain stock, the trend is often already over". This wisdom holds true for both directions of movement regardless of whether we talk about GameStop (NYSE: GME) on the upper side or Wirecard (FRA: WDI) (OTC: WCAGY) on the bottom end of the equation. The art, as we believe, is to identify potential trends beforehand. That means you have to know that BioNTech (FRA: 22UA) (NasdaqGS: BNTX) had the best chances to develop the COVID19 vaccine before they actually did it. Equally, it means that you also need to be attentive to potential structural flaws within a company that does not add up. Browsing through the broad universe of the financial world, I stumbled upon an old friend that shows just these signs of structural flaws.

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In January 2021, Saudi Aramco, which is one of the largest companies in the world by market capitalization, was in the news for manipulating their carbon emission disclosure to paint a more favorable picture of the company's sustainability policies. At that time, we merely viewed this as a marketing measure without any further implications and believed that the company simply wanted to put itself into a better light in front of its shareholders. But roughly three weeks ago, Aramco's annual report for the year 2020 came out. Once again, we see that the disclosed numbers do not accurately reflect the company's actual carbon emissions. That triggered my interest, but I was not alarmed yet.

First of all, it needs to be said that Aramco included more wholly-owned subsidiaries and international refineries in the carbon emission disclosure but still left out some particular entities. After the scandal in January, Aramco should have learned from the consequences and honestly approached the whole thing. In addition to that, the special envoy for the USA's climate (also an old friend) announced last week that there are plans on the way that publicly traded companies will have to disclose the climate risks that they face in the future. This shows that a business's carbon emission aspect becomes a considerable concern for shareholders and is subject to a global reduction trend. In accordance with this trend, the IMF currently works on a concept that allows for debt relief in developing economies, given the case that they invest in structuring their economies in a more sustainable and environment-friendly way. While all these developments are underway, the world's biggest oil company and one of the biggest companies in the world is constantly understating their carbon emissions. However, this is a significant concern due to the nature of this business. Now, the alarm bells start to ring quietly.

Looking at the stock price development of Aramco, we can see virtually nothing special here. Since its IPO, there has been little to no action. This can hint at some problems but does not necessarily need to. Much more unsettling are other things. First, the crown prince of Saudi Arabia announces that dividends might be cut, to use that money to invest into the Saudi economy. Now, private shareholders' dividends should not be touched, but nevertheless, this is a questionable plan. Cutting dividends to boost the Saudi economy? The money would have gone to the Saudi government in any case as it is the majority shareholder with over 95%. So that can only mean that either the Saudi economy is struggling, or the government is struggling. For Saudi Aramco, which is deeply intertwined with both, this is all but a good sign. Now, we can clearly hear the alarm bells ring.

Finally, another structural development now completely triggers the alarm bells to ring at high volume. Recently, Aramco sold 49% of its pipeline business to a US investment company (EIG Global Energy Partners) for $12.4 billion. So what? As an oil company, the pipeline business is one of the cornerstones of the oil business. Further, as a majority owner of more than 95% of Aramco, the Saudi Arabian government is usually keen to retain close to full autonomy. Thus, directly giving away almost half of one of the company's core businesses is naturally confusing. It is almost thinkable that one of the biggest companies of the world is in need of money. Why else should a state-owned company sell one of its core businesses? Combining it with the plan to cut dividends, it remains questionable whether Aramco will invest the money into the economy or is going to be used to solve specific problems behind closed doors. Another aspect of this case is that Blackrock and Brookfield quickly pulled out of the pipeline business negotiations. Naturally, we need to be skeptical if two companies with that much power and expertise directly pull out of these negotiations. We need to believe that the business is either not profitable or there are internal problems. At this point, the alarm bells cannot be overheard any longer.

All these aspects might not forecast the collapse of Saudi Aramco. They also do not predict that Aramco is going to be the next Wirecard case. However, the fact that all these factors come together is highly unsettling and harming Aramco's reputation. It may well be that there is a "leak in the pipe" in the metaphorical sense that the world does not yet know about. But if we hear about it in mainstream media, then remember that the pipe already exploded a while ago.