Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Allen Good. He is an equity analyst at Morningstar in Amsterdam. Good afternoon.
Allen Good: Good afternoon.
Black: So, we're here today to talk about Saudi Aramco, which recently listed on the stock exchange, the biggest listing of all time. Can you tell us why all the anticipation and why that huge valuation?
Good: Yeah, there's been some interest in Saudi Aramco going public for some time, primarily because of its size. It is the largest oil and gas producer in the world at about 13 million barrels per day, 10 of which are crude oil. And so, the size alone merits the high valuation. When you're talking about a company that size it naturally translate into high value. But the interest is largely around curiosity, not so much as an investment opportunity. Aramco and Saudi Arabia historically have been relatively cagey about operational data. And so, the fact that they're going public means that they've started disclosing a lot more data around the quality and the size of the reserves. And so, that in and of itself has attracted a lot of interest as well.
Black: Okay. So, when we do think about this from an investment perspective, what are the positives?
Good: Yeah, I mean, the positive is that buying into Aramco or investing in Aramco, you are investing in the lowest cost resources in the world. So, that is certainly an attractive proposition. In fact, in our methodology it merits a wide mode. It's the only wide moat producer of oil and gas that we currently cover. The second thing I would say is around the dividend payout. So, while most dividends are relying on cash flow, Aramco's dividend certainly is reliant on cash flow, but for minority shareholders, there is a protection mechanism whereby if the cash flow is insufficient to cover the dividend payout, currently at a 75 billion total, the government, the majority shareholder, will actually take a hit and cut their dividend. So, in effect, regardless of the level of cash flow or oil prices, minority shareholders are essentially protected on the dividend front. So, it is, in a sense, a guaranteed dividend payout, which is something you rarely find if ever, in the oil and gas space.
Black: That's definitely appealing for an income investor. So, do you have any negatives or concerns about the stock?
Good: Yeah, I'd say the first one is valuation. We valued the shares at 26 reals. The offering price initially at the IPO was 32. It subsequently rallied about 10% as well. So, we do see shares currently as overvalued. The second thing would be around governance issues. While we do rank Aramco with a standard stewardship rating, that's really around the capital allocation. If you are investing in Aramco, you should know that you are a minority shareholder, and that the government ultimately will be making the decisions. There's certainly some issues around that where they've tried to address such as using Aramco to complete infrastructure projects within the country, around pricing of domestic natural gas and NGLs and also around actually setting the absolute production volumes for Aramco. So, minority investors should know that if they do get the opportunity to buy into Aramco, they should be aware that they will be taking a backseat to the government. But ultimately, government has worked to address some of that through changes. So, just be aware if you ultimately do become an investor.
Black: Well, I suppose that is one big question is how do you become an investor because it's not that easy to get access to this stock, is it?
Good: Yeah, right now, it's only listed on the local Saudi exchange, which does limit access to those who are authorized to own stocks on the exchange, which really cuts out most retail investors. It's likely that Aramco will be added to some global indexes. So, you may be able to get exposure through there. But I would expect them at some point in the future to eventually list on an international exchange, whether it be in Asia or Europe, or maybe even the US, although that's remote. So, if you are a retail investor and you are interested in buying into Aramco, just be patient. I think at some point, they will list internationally and that should give you an opportunity.
Black: And you say it could become part of some indices. So, for retail investors, that means it could end up in an ETF or a tracker fund?
Good: Yeah, certainly. I mean, the size alone, and so, any index that focuses on global equities and includes the Middle East or even Saudi Arabia, for that matter, is likely to add it to the portfolio.
Black: Allen, thanks so much for your time.
Good: Yeah, thank you.
Black: And thanks for joining us.
