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Saudi Aramco: History’s Biggest IPO?

 4 min read / 

Saudi Aramco, usually known just as Aramco, is a Saudi Arabian national petroleum and natural gas company based in Dhahran. Being fully state-owned, Aramco is most certainly the world’s most valuable company with an estimated market value of between US$1.5tn to US$10tn. Even though the company is the most secretive in the world and does not report its revenues or reserves, people familiar with the matter report that Aramco has hydrocarbon reserves of 261 billion barrels, which is more than ten times that of ExxonMobil. It pumps more oil than the entirety of the US – an estimated 10.2m billion barrels per day. Not surprisingly, news about the intention of Saudi Arabia to list shares of oil giant have quickly become the most hotly discussed topic amongst investors and the largest investment banks have started a fight to win a part in listing of Saudi Aramco.

The reasons behind the potential of listing Aramco seem to be simple: Prince Muhammad, the kingdom’s deputy crown prince, believes that the offering of Aramco would greatly benefit the Saudi economy and the company itself. Indeed, the sale of Aramco will bring substantial revenues to the kingdom’s coffers, which would definitely improve the state of the Saudi Arabia budget deficit, which reached a record high of $98bn last year. Moreover, even a small IPO will make “Aramco more efficient and more cost effective through higher transparency” as reported by Mohammad-al-Sabban, a former senior adviser to the Saudi oil ministry.

Analysts suggest that the size of the IPO will never reach the $10tn level as suggested by some. During recent meetings, officials have suggested that options of listing range from offering shares of petrochemical or refining arms of the business to selling shares in the parent company. However, investment bankers are sure that it is practically impossible for the Saudi government to list the parent company due to several reasons. One of them being a question of how new listed entity would split revenue with the Saudi government. Aramco’s original concession agreement dates back to its foundation in 1933 and the exact terms are unknown. Therefore, excluding the main business unit of Aramco from listing reduces the valuation to somewhat between $100bn to $500bn which is a far cry from $10tn. Worth mentioning that whatever the deal size, banks should expect their fees to be low on the percentage basis due to the prestige of the deal and the state-nature of the transaction.

Investors are excited about the possible offering of Aramco, even at today’s low oil prices, however there are also some risks to watch out for. Riyadh, the capital and main financial hub of Saudi Arabia, is dependent on the oil and gas sector for 85 percent of its export earnings. Logically, Riyadh would not be willing to allow Aramco to keep more income from crude for the benefit of shareholders. However, in order for the IPO to be successful, investors have to see a clear picture of potential dividends. Additionally, in order to be listed on the largest stock exchanges and have access to the international investors, Aramco has to report a detailed balance sheet and report of its operations – something that the oil giant has never done before. Some argue that its reserves, which have barely budged since the late 1980s, are overstated. Internal documents about them are “phenomenally closely guarded secrets”.

Even though from the first sight it might seem that the decision to IPO Aramco is not logical considering the current fragile commodity markets, there is a definite logic in the Saudi Arabia’s strategy. Listing of Aramco will add substantial value to the Arabian stock exchange and will force the company to operate more efficiently. It would also fit with a trend that has started to transform the oil industry for the first time in half a century—denationalisation. The big question remains as to the percentage of the company that the Saudis are willing to offer and that would also determine the degree of revealing about the inner operations of Saudi Aramco. Nevertheless, giving investors a stake in the world’s largest oil company can definitely serve as a way to deepen a coalition of stakeholders in the kingdom’s stability. Bringing foreign investors back into the Saudi oil business could be a way to strengthen the economy, reduce budget deficit and would be a first step to throw open the country’s closed economy.

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