Episode Transcript
The Finance Ghost: Welcome to episode 227 of Magic Markets. We come to you after a few weekends of Formula One races in a row and maybe that's what at least partially inspired our decision this week to talk about oil, to talk about Saudi Aramco, and to talk about Ferrari, which of course is a listed company that has a track record of success, pun horribly intended, that is way ahead of where their Formula One team has been performing lately! It really has been an incredible story, that share price.
I think we'll get to that a bit later in the show, Moe, because before that we're going to speak about that wonderful fossil fuel that is powering all these cars that we enjoy so much. And lots of debates around how long that will continue for and what the pricing will be. Lots of relevance to South Africans in terms of companies like Sasol. So yeah, lots to talk about when it comes to oil and companies like Saudi Aramco.
Mohammed Nalla: Indeed, Ghost, I like the interplay this week between me talking about oil and Saudi Aramco and then you covering Ferrari, because anyone who watches Formula One will see the Aramco branding just so prominent, it dominates the sport. And again, it makes sense because Aramco is the world's largest oil producing company that's out there and I'll get into some of the very interesting numbers behind that.
But before I even jump into a look at Aramco, let's actually look at what's happening in the oil markets, because there’s lots of topical stuff to discuss there. Just last week, in fact, it was after markets had closed - was over the course of the weekend - we had a meeting where OPEC effectively announced that they wanted to increase their oil production by 411,000 barrels per day. It doesn't sound like a heck of a lot, but remember this comes after several production cuts that had taken place a little while ago and the market was caught, I would say a little bit by surprise - when I say this, it makes sense that a lot of countries within OPEC want to boost their production because there has been cheating within the cartel. Some of the smaller countries were actually producing above their quotas. And so the larger players, and here we're talking about Saudi Arabia, we're talking about Russia, they’re actually saying let's steady the market, let's protect our market share effectively. And that was largely behind this 411,000 barrel increase.
Now, again, if you just think about this logically, you would think, hey, more oil coming into production, that's going to put pressure on oil prices. But that's not what we saw when markets actually opened up again over the course of the weekend. In Asian trade and then following through into US trade effectively this week, we actually saw oil prices move higher.
And so the first question is: why would that actually happen? Now the obvious answer here is that the market was actually expecting a slightly bigger increase, right? The market was saying OPEC can actually increase by around 500,000 barrels, maybe even more, so coming in at 411,000 actually surprised the market a little bit there in that it was below expectation, which then means that the oil price reacted positively to the news.
Now if we unpack that just a little bit further, if you actually look at what's been happening that could have also contributed to some of the upside move on the oil price, is that we still have the geopolitical tensions going globally. And specifically what pops up here is the Russia Ukraine conflict because over the course of the weekend, we had Ukrainian drone attacks on Russian airfields and then also Iran's rejection of a nuclear proposal from the US and so this heightens the supply risk on the oil market in aggregate. That possibly was also a contributing factor.
Then we've got supply disruptions. In Canada, where I am right now, we've had wildfires that are threatening some of our oil producing regions. So that could contribute to some of the upside move.
And then overall, you've had a weaker US dollar and that generally tends to support commodity prices - oil a big beneficiary of that.
So wrapping up very quickly on the moves from OPEC and then how that filters through into the oil price, those were some of the driving factors over the course of the last week.
Now I'm not going to actually jump into this right now, but I'm going to prep some of this Ghost because I assume you're going to have some questions - when you're looking at oil, it's so important because Saudi Arabia as one of the world's largest producers has what they call a break-even price, a production break-even price. And you would look at this if you're looking at a company and we will cover Aramco shortly, right? But when you look at Saudi Arabia's break even on production, that's all the way down in the single digits. You know, no one can give you a firm number on this, but some people have come up with a number between $3 to around $7.
Now even if you want to be a little bit more conservative and say maybe that's around $10 to $12, that's significantly below where spot prices of Brent Crude actually sit today in around the mid-60s. So that tells you that Saudi Arabia, or at least on a production level, they are making mountains and mountains of money on every barrel that they're sending out there.
Now that's very different when you look at it at a fiscal level and a lot of people look at this because again, you can't decouple Saudi Arabia's oil production from what's happening at a sovereign level. Saudi Arabia is investing heavily in their own economy. They're trying to diversify that economy. As you say, fossil fuels are somewhat on the back burner globally and so economies in the GCC or the Gulf region effectively are going to have to diversify. And we've got these mega projects. NEOM, for example, that new city that they're building in a straight line that's costing billions and billions of dollars. At the same time, they've got pressure from partners and allies like the United States that are saying, hey, we want you to invest a trillion dollars in the US economy. And they've committed to several hundred billion dollars, how much of that actually materialises need to be seen. But when you wrap all of that up along with the social spending that happens in Saudi Arabia, remember they don't have any taxes coming through from their population, that means that the fiscal break-even is actually a lot higher. And let's quantify that because when I say a lot, I mean a lot.
Fiscal break-even for Saudi Arabia is in the region of around $80 to $86 a barrel. Now that is significantly above or where we find oil prices today. And so that's going to mean either that they run down some of their reserves or that they actually look at bolstering their market share. But that's the double-edged sword because if they bolster market share, it puts pressure on oil prices. If they actually sit back and let their market share wane a little bit, it might allow the oil prices to rise a lot more. But at the same time, that's on the back of needing to offset the loss in market share. So lots of complexities at play there, Ghost, and that's before we even look at what's happening at an operational level with Saudi Aramco.
The Finance Ghost: Yeah, it's been fascinating. So, as a sports enthusiast, I mean, Saudi Arabia has been all over a lot of sports - golf, they've built LIV golf, they've thrown tons of money at trying to just get Saudi Arabia's reputation, I think, to be a little bit better and to try and drum up some positive PR around this, right? And that's money's come from oil.
Mohammed Nalla: That's how you get to an $80+ fiscal break-even is you're investing in everything that's out there, Ghost.
The Finance Ghost: Yeah, and the word “investing” is probably working a bit hard here because I think there's nothing about LIV golf that is remotely reasonable. The numbers being put on the table, I mean, it's just crazy and it's not sustainable. And what I always find interesting is, I wrote about Sasol quite recently and so I looked at the required break-even on Brent Crude, which I can tell you is definitely not single digits, sadly, and how that works in their value chain. And I considered, well, what has Brent Crude done over time? Because as South Africans, you're conditioned to, well, petrol costs so much more now than it used to and it must be the oil price. It is not the oil price. Ten years ago, Brent Crude was trading at the same levels it's trading at now. So there's been basically zero inflation. Yes, there's been lots of volatility and it's been much lower than it has been now as well at times. There's been tons of volatility, but generally speaking, there's no trajectory here. This thing is just flat.
Now, the reason that South Africans then get hit with what petrol costs is because of, one, taxes. Government loves that. And two, of course, the rand. So in South Africa, we get hit with this. But overseas, if you're buying in dollars or a hard currency and you're in a place where maybe the taxes don't tick up every single year in this regard, fuel prices have actually not really gone up. And this is a big problem for the fuel producers where their output is Brent Crude because their cost of getting the stuff out the ground has gone up and yes, their break-even might be very low, etc. but there's still surely been a squeeze, right? There's been inflation, there's pressure on margins in the space globally.
Mohammed Nalla: Undoubtedly. And that's really why - I mean, we still use oil. The world's trying to decouple from oil and so it becomes a volume game. And that's why a player like Saudi Arabia can continue doing what it does. But at the end of the day, the lights are going to go off and the music's going to stop. And the question mark is whether economies like Saudi Arabia, like the rest of the GCC, very oil-reliant economies can actually diversify appropriately.
Now it's so interesting because I'm going to touch on Saudi Aramco and I'm getting to some very interesting nuggets here. But this is actually the world's largest oil producer. And I'm gonna start out by saying that there's no easy way to invest in Saudi Aramco because initially there were thoughts that they would float an IPO in the US but eventually they decided to just list this in Saudi Arabia. Now remember, the Saudi government is the largest investor. It's not as though they need the money - and perhaps at some point in time in the future, they will consider a global listing or a US listing, time will tell. But the only way you can get exposure to Saudi Aramco is if you are actually a qualified institutional investor. So they're basically saying, if you have hundreds of billions of dollars, yes, we'll speak to you. You go there, you apply, you become a qualified investor. And then you can actually go out there and buy Saudi Aramco stock directly on Saudi Arabia's exchange.
For retail investors like you and I, you can only get indirect exposure. And there are a number of ETFs that offer exposure to Saudi Arabian stocks and there Aramco will feature very prominently just because of its size. But there's no direct exposure, let's start off with that point.
Now let's look at the company directly because this was something that was actually born out of a cooperation between Saudi Arabia and the US. It was actually the Saudi American Oil Company that then eventually became the Saudi Arabian Oil Company, now known as Saudi Aramco. And I say it's the world's largest oil producer, but remember, oil producers don't trade at the same kinds of multiples that for example, tech stocks would trade at.
We've recently covered NVIDIA on Magic Markets Premium. And to compare NVIDIA, where for example you're looking at quarterly numbers at around $45 billion, when you're looking at Aramco - and here I'm going to look at revenue - Aramco's revenue in one quarter was around $108 billion. That was actually up quarter-on-quarter from $107, it's up to $108, which is remarkable considering that the oil price has gone nowhere. But that gives you the sense of scale of just how big this company actually is. Now, if you actually break that all the way down, it drops down into a free cash flow on a quarterly basis of just shy of $20 billion every single quarter. So you can see how this becomes a very valuable cash cow for the Saudi Arabian government.
Now, the last interesting tidbit that I actually picked up on here is that Saudi Aramco, I think it's Forbes that actually quantified this, but it pays the world's largest dividend. Now, the Saudi Arabian government's balancing the books on this dividend. But total dividends were declared for the quarter, they were actually up at $21.3 billion. That's a massive number. But again, you'll be correct to realise that you've had a dividend of 21 plus some change, $21 billion, but you only had free cash flow of sub-$20 billion. So that tells you that not everything's right, but there is pressure from the core shareholder to say, keep the cash flow coming, we actually need this money to come through.
Now, some of that's being done off the balance sheet. The gearing ratio has increased, but it's very modest. It's actually at around 5.3% and that's not massive. It was 4.5%, so yes there is pressure, it's moving in the wrong direction, but it actually tells you that the company does still have very deep pockets and it remains this cash cow. Now, at the end of the day, like I say, you can't invest in Aramco. There's no way, unless you are that qualified foreign investor, you are an institutional shareholder. A lot of people are saying, why are we discussing this? And the reason we're discussing this is it does give you a very useful look-through in terms of what's happening in the industry as a whole.
I'm going to go full circle on this Ghost as I wrap up the discussion around oil and then Saudi Aramco specifically. I spoke about break even prices. We know how important the US is as an energy producer, oil producer globally. We know the Trump administration really wants to see that industry flourish in the United States. But there's one key problem, and that is that when you look at US shale oil, that has really been the big delta. It's why the production numbers in the US have gone off the charts. I actually think the US is the world's largest oil producer as a country as a whole. But the problem here is that the break-even for that US shale belt comes through, depending on who you speak to, between $60 to $75 a barrel.
And so with oil prices where they are right now, it's at a knife's edge. And if they fall much lower, it's going to put a lot of those US marginal producers under significant pressure. And again, that flows through to demand and supply dynamics as well. Because if those shale producers can't produce profitably, they're going to shut down production. It's a lot more dynamic than what you're seeing in some of the other operations globally. They move very quickly and when they shut down production, that's going to mean upside pressure on oil prices, which is bad for you and I at the gas pump, but it's actually good for a player like Saudi Arabia that actually needs those oil prices to go higher because they’re really kind of maxed out in terms of the market share Ghost.
The Finance Ghost: I always learn so much on the show. I actually didn't realise it was so hard to buy Saudi Aramco shares. I mean, I know it's listed only there, but yeah, you're right. I mean I checked now - it is, it's almost impossible to actually buy the shares. So it's not that it's a moot point. It's like you said, it's understanding the broader industry. I’ve got to tell you, I'm quite ready to talk about Ferrari if you are.
Mohammed Nalla: Absolutely. I mean we see the Aramco branding all over Formula one, but again, this filters down. I want to hear what you've got to say about Ferrari. It's certainly my team, they've had terrible track performance. Let's not even go into that, right?
The Finance Ghost: Yeah, look, I mean it's fascinating to compare the performance of the share to the on-track performance. I'm going to couch that because the on-track performance in F1 has not been particularly great. But I was at Le Mans last year which was an absolutely amazing experience. And seeing the strength of the Ferrari brand, seeing that 499 win, seeing just how amazing it was to actually witness this live and the strength of the brand.
I think that your customers that are buying the high-end Ferraris - World Endurance Racing has got a very, very passionate following of people who are genuine petrolheads. I think Ferrari, or rather Formula One has a lot of incidental fans. They watch Drive to Survive. They watch it like they watch any other sport on TV. That doesn't necessarily mean they either would buy something like a Ferrari, or can afford it. But when you get into the World Endurance Championship, you are getting a lot closer to the people who are actually pulling the trigger to buy these cars. A lot of those big fans and the people who have the money to buy these cars are going and watching the races in Imola. They are going to watch Le Mans, certainly.
Ferrari is doing really, really well there. They're not doing well in F1. They're doing very well in sports car racing. And of course they do get podiums in Formula One, even if they're a bit light on world championships. In fact, they're very light on world championships. The last one, as you'll remember Moe was 2007 with Kimi Raikkonen. So that is a long time ago.
Now luckily, if you own the shares, you don't need to be too worried about world championships in Formula One because they are making a ton of money. I'll give you an idea just to set the scene. Compound Annual Growth Rates - so over a year, 15.8% share price. Fine. Over five years, 22.3% CAGR. Delightful. Since listing in 2015, you just go and max out that chart, 26.6% CAGR and not an F1 world championship in sight anywhere in any of those years. So it's been a great story.
Ferrari’s strategy is all about maximizing the revenue per car, not the number of cars they are selling. We've covered them before in Magic Markets Premium. It's manufactured scarcity. They will not meet demand. It's a deliberate thing that they do and it actually forces people to almost fight their way to the top of the queue. You want to go and get a Ferrari? Cool, well, the order book is full until the end of 2026. How do you get up the queue? I would think you go and spend a bit more, right?
I mean, I don't know. I've yet to go and spec a Ferrari myself, as I'll be wasting the dealer's time and my own by several million rand because the new prices these days of Ferraris are completely insane.
It's actually very interesting. I spoke to someone I know who has a business that does second-hand cars, as in high-end exotics. And the gap at the moment between the 2000s and early 2010s Ferraris and their value and what a new one costs is literally millions and millions. You can buy several of those older Ferraris for the same price as a new one. So it's actually quite hard for people who are doing pre-owned Ferraris because the stock churn is a bit of an issue. People don't want to sell their 458 or their 430 because the replacement is a car that is literally many, many millions more.
And this tells you how much Ferrari have gone and actually ramped up their pricing strategy - because they can, bluntly, and because the technology in the cars has changed a lot. You've got a lot of hybrids now. And if there were ever any worries about demand for these hybrid Ferraris, as I say, the order book - the whole of 2026. So, no problems there. And much like a business like Hermés, they are just building this list of VIP clients. If you want a special edition Ferrari, you get asked to buy one. And if you say no, you know, sorry, I'm a bit too poor this year, well, you know, next year the phone probably isn't going to ring. So it just creates this incredible situation where they can literally charge essentially whatever they want.
Now the big news and what's going to be very interesting in terms of their product range is an all-electric Ferrari. Now, a hybrid is one thing, but all-electric is a very interesting thing. This is going to be a big test for the brand. Will they survive in a world that moves past combustion engine cars? Question one. Question two: will we ever have a world that has moved past combustion engine cars? I don't think so in terms of exotics. I think it's a bit like horses. Once upon a time, everyone rode a horse to get around. Now it's a recreational, expensive thing that wealthy people do for fun. Why won't it be any different with a V12 Ferrari? You'll still be able to get your fuel. Maybe you'll just go fill it up at the dealer and then go on your drive and everything else. So I do think that that will always have a place.
But just in case it doesn't, they are hedging their bets here. They are building an electric Ferrari. Deliveries due to start October 2026 in case you’re feeling itchy there, Moe. And their technology reveal starts in October this year. So this company will spend 12 months basically preparing the market for, hey, an electric Ferrari is coming. I mean, that's the kind of branding you're dealing with here. It's fascinating right?
Mohammed Nalla: You just have to love the strategy, right? It's this curated demand. The fact that they're prepping the market for an entire year for this car means that they're not going to be able to fulfil those orders for the next several years. Incidentally, this weekend we were actually driving up into the countryside here and I actually drove past two Ferraris just on a simple drive. I've been seeing a lot of Ferraris up here in Canada, which means that a lot of Canadians are probably doing a lot better than I am because those are the new Ferraris. They weren't even the old ones. So, you joke, at best I could probably go and try and find a very, very old Ferrari, but I'm probably more likely to just go and buy that $RACE ticker, right? The Ferrari stock. Because again, we just covered Nvidia. And if you look at Nvidia, just over the course of the last couple of years, the last two, three years, it's been a 10x stock.
Now Ferrari is not quite as stellar as that, but I was looking at this and it's been a 10x stock from 2016 to where you are right now. And if you actually think about that, that is still quite staggering because at the end of the day it's a fully discretionary purchase. It's luxury goods. They've done a lot better, certainly than a lot of the other luxury goods stocks that have come off the hype that they were in over the course of the last couple of years.
But Ferrari has actually done very, very well. And I think your point is so valid in terms of that distinction between the occasional viewer, the F1 supporter. I mentioned I'm a Ferrari supporter, I don't drive a Ferrari, right? Probably can't afford to buy the new one. But at the end of the day, I'm a long-suffering Ferrari supporter. I supported them back when they won world championships and continue to support them today. But I also am an enthusiast because I'm going to go and watch the other racing where Ferrari is doing a lot better as well. I think those dynamics are important.
Ferrari's also moved into the lifestyle goods and that's for the, let's call it quite frankly, the poorer people like you and I. I'm going to go buy a Ferrari cap, I'm going to buy Ferrari shades, going to buy Ferrari sneakers. And again, that's just because you want to be associated with that lifestyle and then maybe one day when you can buy a Ferrari, you're going to try and get yourself on that order book. The fact that they can just fulfil orders for repeat customers, that tells you about the strength of its brand positioning, which I quite frankly think they've done a lot better than pretty much any of the other luxury brands that are out there, maybe barring Hermes at a real stretch. And again, some interesting tie ups there. For those of you that follow Magic Markets Premium, you've got board members from Hermés that sit on the Ferrari board, as well as from LVMH. So it's a very tight ecosystem in that ultra-luxe space.
The Finance Ghost: No, it is. And what's interesting with Ferrari is the total cost of ownership for people over a long time is actually much lower than it is for a lot of other luxury brands because of the depreciation.
Mohammed Nalla: That surprises me.
The Finance Ghost: If you go look now at a 10- or 12-year old Ferrari, the price today is roughly what it was then. Yes, there's been 10 years of inflation. No one is suggesting this is a great investment unless you're sitting on a 1960s gold mine type Ferrari. But you're not losing anything like you are on an Aston Martin or whatever the case may be. I mean, I am half-Italian. I love Italian cars. Mine has a trident on it rather than a stallion because the tridents depreciate like absolute crazy. And you can pick yourself one up for the price of a Golf basically, which is a pretty lovely way to have an Italian car. But unfortunately Stellantis is dealing with this problem now. Maserati is financial disaster.
Mohammed Nalla: Yeah. When you bought it, it was still within the Ferrari stable, right? I think when you bought it was still in the Ferrari stable back in. I was trying to give you a Ferrari-light. I was trying to say Ferrari-light for the Ghost.
The Finance Ghost: No, it's only Ferrari when it needs parts and then it really is a Ferrari and it costs Ferrari money to maintain it. But that's definitely a story for a different podcast.
I think the point is that a business like Maserati, the issues Stellantis has is they're trying to sell it as a luxury car, but it's really just like a Porsche-level car which is still luxe, but it's actually that more affluent-level ownership, in car land obviously. And what that means is these things depreciate. It's not like a Ferrari where a Ferrari is forever. Effectively you just have to ride the initial depreciation curve.
It's a big part of their business. And if you go on their website you can see that permeating through, you know – “value your used Ferrari” - when have you ever seen that on a Mercedes-Benz website? We'll value for you what your 20-year-old Mercedes Benz is worth. You're never going to see that in your life. They just want to sell you something new. Ferrari is about maintaining all the ones that already exist.
So anyway, to bring it to a close, just looking at the latest numbers, just how strong this company is. Q1 2025, there was no tariff impact here. These numbers are without tariffs. Net revenue up 12.2% constant currency. Personalisation is responsible for 19% of their total revenue from cars and spares.
So in other words, the Ferrari in the brochure - no, I want to go and make sure I personalise it exactly the way I want it. That is basically a fifth of their revenue, is from personalisation and that's where the margin comes from.
Diluted earnings per share up 17.9%, so there's some beautiful leverage for you. Revenue 12.9%, Diluted EPS 17.9%.
Another interesting point, EMEA and the Americas represent 3/4 of shipments. So yes, Moe, there are lots of Ferraris in Canada, Hong Kong, China, Taiwan, 7% of shipments. It's come off a lot because of what's happened in the luxury world in China. Ferrari one of the very few that can just say, oh there are fewer or orders from China, not a problem, we'll just fulfil more orders elsewhere. I mean this is the strength of this business.
Interestingly, they've affirmed their 2025 guidance, but they've said there's a 50-basis point risk on EBIT and EBITDA margins thanks to the US tariffs. So in some cases they'll eat the tariffs and in other cases they won't. And it's going to go model by model, I imagine personalisation is going to play a role here. We'll see what happens.
And just where I want to end off, the most Italian comment ever. And I always love this because I am half-Italian, I drive Italian cars, I've always had Alfas and all sorts of things, so I just love this. They were asked: is the guidance conservative? And I'm not going to attempt an Italian accent here. It just feels silly.
But they say: “Is the guidance conservative? We are never conservative.” Bang. We are not conservative people. Do you see our cars? Do we look conservative to you?
Mohammed Nalla: Ciao, Ciao, bella, ciao.
The Finance Ghost: 100%. Got to love it. So, yeah, that's where Ferrari's at right now in terms of things that are resilient to tariffs, resilient to China, resilient to everything, including trying to win Formula One championships. Ferrari is a pretty good choice.
Mohammed Nalla: Ghost, when you can sell a Ferrari to a Canadian that can probably only drive it like three or four months a year, you know that you've got strong brand cachet. Yeah. I mean, really, someone who's outlaying that kind of money in Canada must have a lot of money.
We didn't get the time to go into it, but Aston Martin Lagonda, I mean, what a dog. Go and have a look at that share price. Terrible. And that just shows you the differentiation is that they're expensive cars, their luxury products are out there, Aston Martin is trying to do what Ferrari is doing. You know, they've got the brand and lifestyle wear that goes with it. And just failing to actually convert that into financial returns. Again, testament to the fact that Ferrari is at the apex of its game, even if not in Formula One, certainly in terms of selling cars and then selling those lifestyle goods to people like you and I.
Maybe personalisation on that. I should have a “Moe” engraved on my hat. I'll pay for that. And that could contribute to those very healthy margins and personalisation as well.
The Finance Ghost: Yeah, there we go. And of course, just last point. Who is a big investor in Aston Martin Lagonda? Saudi Arabia Public Investment Fund. Taking those beautiful Aramco dividends and wasting them on silly things.
Mohammed Nalla: And very rich Canadians. Lawrence Stroll is the head honcho at Aston Martin. So some commonality there, right? Canada has lots of oil, Saudi has lots of oil, and they both like to waste their money on very expensive, shiny stuff.
The Finance Ghost: It's just incredible. Ferrari is the one you want and the rest is noise I’m afraid.
Mohammed Nalla: Ghost, that's unfortunately all we have time for this week. Very fun, slightly different show, I think this week. Touching on a bit of the macro, a little bit of the company specific stuff and lifestyle stuff. Everything we love here - markets, fast cars. We hope you've enjoyed it.
Let us know what you thought of the show. Hit us up on social media. It's @MagicMarketsPod, one word, @FinanceGhost and @MohammedNalla. All on X or go and find us on LinkedIn, pop us a note on there. Until next week, same time, same place.
Thanks and cheers.
The Finance Ghost: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
