Imagine a scenario: a company with a single very large asset finds itself in a market that is unraveling. Commodity prices are low, investors are demanding risk assessments, ratings agencies are slashing scores on what were once considered blue chip investments and there is superior technology available which is rapidly making those assets redundant.
What’s a CEO to do?
It is noteworthy that we are watching this scenario play out as we speak in their form of Saudi Aramco’s IPO which was priced today.
The Saudi’s announced their desire to float Saudi Aramco several months ago and were met with less than enthusiastic response. In fact, it fell flat with international institutional investors. And this despite the fact that Aramco is sitting on massive proven reserves and can pull that oil out of the ground cheaper than anyone out there.
So the Saudi’s changed tack. They decided to keep the wealth near home and rely heavily on local monies from the Gulf States.
P.T. Barnum once famously quipped that “there’s a sucker born every minute”. And he was right. A whole lot of suckers today paid top dollar for assets that will be worthless probably sooner rather than later.
Anish Kapadia, director of energy at Palissy Advisors, an investment advisory firm based in London, stated:
“It’s hard to see how the company (Saudi Aramco) grows over time”.
Tarek Fadlallah, chief executive of the Middle East unit of Nomura Asset Management, went further stating:
“It's essentially a one product company, and the price of that product is very volatile”.
So questionable growth prospects, lack of diversification and price volatility. Those are considerable headwinds.
But that’s not all.
Institutional investors are under enormous pressure to assess climate risk within their portfolios and many are moving even further toward outright divestment. Additionally, the Paris Accord cannot be met given the current status of recent commitments by large oil and gas companies. This is leading the world toward ever more civil unrest as climate wreaks havoc with communities globally. Given enough civil unrest, political will will make an astonishing turnabout. It’s just a matter of time. And lastly, oil companies just aren’t that sexy anymore. Where once Big Oil had a significant voice in global stock indices, it is now not much more than a whimper. For instance, oil and gas stocks now make up a mere 4% the S&P500 and the largest of them all, ExxonMobil, recently dropped out of the top 10. ExxonMobil had been in the top 10 for more than 90 years.
So if you are sitting on one of the world’s largest oil assets and you are prudently assessing your prospects given the current and projected market environment, you just might decide that it makes a lot of sense to monetize your asset now.
In other words, take the money and run.