Aramco publishes prospectus for its eagerly anticipated initial public offering (IPO)

The world’s largest oil producer and supplier is poised to go public before the end of 2019 with a valuation of $2 trillion.

Aramco publishes prospectus for its eagerly anticipated initial public offering (IPO)

Aramco is owned by the government of Saudi Arabia which now is looking to make privatize the company and launch an IPO where approximately 5% of its shares will be made available to the public.

This could be a historical IPO since Aramco is one of the most profitable companies in the world with hundreds of billions in annual revenues.

Aramco was initially called CASOC, which was founded in 1933 when the Standard Oil of California (SoCal) company won a bid from the Saudi Arabian government to drill for oil in the region. SoCal appointed its subsidiary, California-Arabian Standard Oil (CASOC) responsible for the drilling but they didn’t struck oil until 1938 in a site in Dhahran. In 1944 the company was then named the California-Arabian Standard Oil Co. to Arabian American Oil Co. (Aramco) and by royal decree the Saudi government created the Saudi Arabian Oil company in 1988 to take control of all Aramco assets.     

Today, Aramco is one of the largest players in the global energy market as it holds more than 260 billion oil barrels in what appears to be the largest oil reserve on the planet. In fact, Aramco’s reserves are four times as large as the rest of major players combined.

The company’s oil refineries are used to refine the extracted oil into petrol and petrochemicals. In short, Aramco has a unique role in the global energy supply and its IPO provides a unique opportunity to invest in the Kingdom of Saudi Arabia and its economic growth.

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Economic diversification

While Saudi Arabia’s oil reserves are vast, unfortunately they aren’t infinite and eventually supply will dry up. The economy of the Kingdom heavily, if not entirely, relies on its oil exports which can’t be considered a sustainable strategy for future economic growth – especially at this stage where the world is trying to move away from hydrocarbons.

This gave rise to the “Saudi Vision 2030” which lays out plan to alleviate Saudi Arabia’s oil dependency and diversify the economy by investing in public sectors such as healthcare, tourism and recreation. An ambitious endeavor that is set to be achieved by the year 2030.

Aramco’s IPO appears to be one of the main channels of funding the Saudi Vision where the proceeds from the offering will be funneled into the Kingdom’s various projects such as the Red Sea luxury resort, a mega-development covering 50 islands and 34,000 square kilometers.

 

A high-risk investment?

There is no doubt that there is enormous profit potential with Aramco’s IPO and it’s no secret that stock exchanges outside the region are looking for ways to entice the company in order to offer its stocks on other exchanges besides Saudi Arabia’s Tadawul. However, as with any investment, there are potential risks as well as rewards and in this case the reward could match the risk.

Investors are worried about the recent drone attacks on Aramco’s extraction and refinery facilities in Abqaiq which severely disrupted production by half. Fears over sociopolitical turmoil and risk premiums due to terrorist attacks could be a challenge for the company’s valuation.

That being said, Aramco divulged in its prospectus that it’s committed to a generous dividend policy which may serve to alleviate some concerns. The prospectus promises “cash dividends of at least $75.0 billion”. These payouts will be guaranteed for the next five years and external investors will have priority over the government.  

However, the final offer price and number of shares to be made available have not been disclosed as of yet and apparently will be determined at the end of the Book-Building Period.

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