Saudi Aramco - A Leak In The Pipe

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.

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William K. 2 months ago Member's comment

It does sound like it will be"interesting", but not fun at all.

I am aware that sometimes decisions are made based on emotions and not logic, and that causes unfortunate results. I can offer no solution to that.