Saudi Arabia sold shares of Aramco in an initial public offering on Dec. 11, but investors should be wary of the risk factors despite the company's profitability, finance and energy experts say. The term VUCA is an acronym that combines four distinct factors: volatility, uncertainty, complexity and ambiguity. “Saudi Arabia as a country has all the qualities associated with a ‘VUCA World,’” Bruce M. Everett, professor at the department of international business at Tufts University, said in an email.
The volatility issues
Aramco is a petroleum and natural gas company, so its profits are essentially dependent on oil prices, which are volatile by nature. “Investors of course face the market risk of lower future oil prices,” said Everett, who specializes in global oil markets, international energy and environmental policy.
However, the value of the shares’ volatility will not only be reciprocal of changes in oil prices, but also will be influenced by the geopolitical and geostrategic contexts, said Ahmed Adel Khoga, chairman and founder of Cairo-based Alycons for Financial Consultancy and Training. He points to the impacts of events such as the recent attacks on Abqaiq and Khurais oilfields and the tensions between the kingdom and Iran.
The company was projected to sell 1-2% on the Saudi Stock Exchange, also known as Tadawul. Private investors are likely to own a small share of the equity so they will have no voice in the governance of the company, according to Everett.
To add to that, the investors will have very limited legal rights as shareholders, if any. According to Everett, a scenario that could easily happen would be the Saudi government leaving the company in a position similar to that of Pemex in Mexico with all of its profits taxed away.
Of course, when assessing the factors surrounding the uncertainty attached to this IPO, highlighting political factors is necessary. “Investors would face the risks of regime change in Saudi Arabia or production and export limitations due to a high level of violence in the region,” said Everett.
The control of complexity
The government’s control of the company does not only add to the uncertainty factor but also to the complexity of this IPO. Khoga said the Saudis are aiming to diversify their revenue streams. According to him, if they sell these shares, they could earn trillions that they can invest in other businesses and industries to secure a more diversified portfolio.
“For the Saudi government, this reduces the risk, the risk that can be washed away by diversification,” he said.
Furthermore, this IPO will lead to a restructuring of the shares of the oligarchs and their line of succession. This is an added complexity that vexes economists and financial consultants as they will be dealing with, as Khoga described, “a dynamic reservoir of oil and gas.”
Since the shares were only listed on the Tadawul market, there are concerns regarding the company's transparency and financial procedures. So far, the Saudi government has been “ambiguous on purpose,” said Khoga.
He said he believes that even the number of shares that the Saudis had planned to sell in December was just a whisper number, projecting that in reality, 5-10% of the company's shares will be sold. The main dangers that investors would face due to this ambiguity is that the rules that should be followed are not clear and there is a lack of transparency.
To invest or not?
Aramco is indisputably the most profitable company in the world. However, as Everett said, investors in the company will have to be ready to face the risks associated with the fragility of Saudi society and the geopolitical instability of the region.
The best suited investors for such an IPO are large institutions with limited diversification options for large sums of money, he said. However, it would be too risky of an investment for new investors or smaller institutions that can enjoy diversified investment portfolios. “The risk is simply too high for the reward,” he said.
*Freelance op-ed contributor, MA journalism student