Saudi Aramco Valuation Comes up Short

11/18/2019 12:26 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The valuation of the impending Saudi Aramco IPO has come up short of expectations, reports Phil Flynn.

A profit of $111 billion dollars is not what it used to be. The Saudi Aramco valuation looks as if it is going to come in short of the $2 trillion valuation that Saudi Crown Prince Mohammad Bin Salman Al Saud, MBS for short, had hoped for.

Not even his talents in the power of persuasion against his own people it seems were able to sway foreign investors that were a bit leery of those lusty expectations. Despite being the most profitable company in the world, it seems that the negatives being associated with a company that is still 98% owned by the Saudi government gave some pause. It may be that the yield on the dividends is still going to come in lower that some of the other big oil major’s, but also the fact that the Saudi government has some significant baggage.

Not only do some major investors have some concerns about being in business with a government that allegedly murdered Saudi journalist Jamal Ahmad Khashoggi, but also a company that may be opening itself up to lawsuits regarding climate change. There is also concerns that the Saudi’s are selling because they see the writing on the wall when it comes to the peak global oil demand. The reality is that Saudi Arabia’s Crown prince is to blame for the missed valuation.

In the meantime oil prices had a great end to the week as the market seemed to believe that not only was the United States and China close to securing a “Phase One” trade deal but also the possibility that the Democrats were getting close to voting on the USMCA trade deal (Nafta 2) with Mexico and Canada. House Speaker Pelosi seems to be suggesting that the Democrats would be wise to get this done as opposed to hanging their hat on an impeachment trial.

This comes as the U.S. oil rig count continues to plummet. Market Watch reported that Baker Hughes (BKR), +3.65% on Friday reported that the number of active U.S. rigs drilling for oil fell by 10 to a total of 674 this week. That followed declines in each of the last three weeks. The total active U.S. rigs, meanwhile, also fell by 11 for a total of 806. The rig count has dropped by -214 (-24%) since this time last year. The drop in the rig count is making the EIA projection on U.S. oil production a tough one to beat. U.S. production of oil should start to stagnate.

Oil demand on the other hand is better than the naysayers have been telling you. The International Energy Agency (IEA) reported that global oil demand in the third quarter of 2019 grew by 1.1 million barrels a day, more than double the 435,000 barrels a day in the previous quarter, according to the latest report from the IEA. China was the largest contributor, with demand increasing by 640,000 barrels-per-day year-over-year. The report projected a year-over-year acceleration in global growth of 1.9 million barrels-per-day for the final quarter of 2019.
I am hearing from happy hedgers and yes you still should get hedged. Global supply is tight when based on forward product demand cover and new International Maritime Organization (IMO) rules still give us significant upside price risks. 

Natural gas is looking past a warm-up to a very cold December. But the big picture is the Unites States is looking to the future as Freedom Gas is going to be unleashed on the world! The Huston Chronicle reports that Federal regulators appear poised to make permit decisions on the applications submitted by four liquefied natural gas export terminals in Texas. After more than three years of review, commissioners with the Federal Energy Regulatory Commission have placed permit decisions for the four projects on the agenda for the agency's Thursday morning meeting. Three of the proposed projects are to build new LNG export terminals at the Port of Brownsville in the Rio Grande Valley while the fourth is for an expansion of Corpus Christi LNG, a South Texas export terminal owned by Houston liquefied natural gas company Cheniere Energy.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn / Facebook: Phil Flynn

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