Lessons For Exxon Mobil And Chevron From The Recent Aramco Bond Sale

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Includes: ARMCO, CVX, XOM
by: Daniel Thurecht
Summary

The financial news surrounding Aramco has flared up again following their first publicly released profits and their bond issuance that attracted a massive $100B of interest.

I find it interesting and telling that this massive interest has occurred against a backdrop of rapidly increasing anti-fossil fuel activist investing.

I believe this situation indicates there is still ample capital willing to be allocated to oil and gas companies, despite the success of the divestiture campaign.

Naturally, this is quite a positive situation for Aramco's western competitors, Exxon Mobil and Chevron, which carry less political risk and thus should retain capital market access longer than Aramco.

Introduction

The Saudi national oil champion, Saudi Aramco (ARMCO), has once again been making the financial news, most notably with the first public release of their profit numbers that topped $111B last year. Aside from the fanfare following this announcement was also their large bond sale that attracted a massive interest that exceeded $100B, which completely oversubscribed their $12B offering. Whilst many investors may simply brush this news off as a side show, it actually presents a lesson for investors on both sides of Exxon Mobil (XOM) and Chevron (CVX).

Relating This To Exxon Mobil & Chevron

If you’ve been involved in financial markets for any length of time, there is a very high probability you’ve already heard about the rise of ethical, ESG and responsible investing. Although their names and technicalities may vary slightly, they all share essentially the same goals and impose essentially the same investment restrictions. To simplify my writing, for the purpose of this article, I’ll refer to all these as simply “ethical investing or activist investors”. Whilst the areas that ethical and activist investing focuses on are broad ranging from labor conditions to competitive behavior, quite possibly the largest area of focus is climate change. Since this article is concerning oil and gas companies, naturally this area is once again the focus of discussion.

Without providing unnecessary details, ethical investors purposely exclude investments in fossil fuel companies, both in equity and debt markets. Although some investors simply take this approach due to their personal consciousness, there is another activist cohort who claim this pressures the companies to change their operations. Theoretically, this pressure is applied through reducing their ability to raise capital from either equity or debt markets, as divesting removes their ability to vote on proposals that would redirect the company’s strategy. Naturally for this style of activism to achieve anything meaningful for the world, it will have to impact foreign national oil and gas companies whose production often far exceeds their western counterparts.

Over the years, there has been a number of large institutional investors switching sides and begin demanding their capital isn’t invested in any fossil fuel companies. This may cause some investors who still own fossil fuel investments to believe the push to divest from their assets is posing a significant threat to their investments. Although on the surface this may sound warranted, I believe the recent Aramco bond sale clearly indicates this doesn’t pose any threat in the foreseeable future.

If an oil company that is owned and controlled by an autocratic regime with a questionable human rights record, putting it mildly, can still easily raise a massive amount of capital, I see no reason Exxon Mobil and Chevron couldn’t raise capital similarly if required. Considering the high political risk associated with Saudi Arabia, if there was ever going to be an oil company impacted by activist investing, it should have been Aramco.

I’m not saying that the fight against climate change won’t impact demand for oil and gas in the future. What I’m saying is that provided the oil and gas industry continues raking in huge profits, they will retain access to capital markets and continue operating seamlessly, regardless of what activist investors desire. This renders the threat posed from ethical investing insignificant compared to other risks, such as economic crises and black swan events, and thus investors should focus on threats that impact their profitability, not distractions from ethical investors.

To be fair, there is a possibility I’ve misjudged the future impact from ethical investors; however, luckily this Aramco situation also provides an example of a warning sign that Exxon Mobil and Chevron investors can monitor. Due to the significant political risk and general ethical concerns associated with Saudi Arabian investments or those from similar nations, it’s likely they will have difficulty attracting capital before their large western brothers. Consequently, I may start being concerned if evidence emerged that oil and gas companies such as Aramco were finding it difficult to raise capital, especially from debt markets. If this eventuates during normal market conditions, I would consider it to be a warning sign that perhaps the future isn’t occurring as I currently foresee.

A final supporting consideration is the following sentence from the International Energy Agency’s 2018 Coal Market Report, “Despite significant media attention being given to divestments and moves away from coal, market trends are proving resistant to change”. Although coal and oil are different commodities, they’re both fossil fuels and primary targets for divestiture activists. It stands to reason that if the coal market is proving resistant to change in the face of the constant onslaught against it, then so should the oil industry, which I would argue is even more integral to the world and thus difficult to change.

Conclusion

After reviewing this recent Aramco bond sale, it appears that to the displeasure of environmental activists, their actions have had essentially zero meaningful impact on large fossil fuel companies’ ability to raise capital and operate. Therefore, the old adage of “money talks” is still alive and well, which I personally believe will continue indefinitely into the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.