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Explained: Why Saudi Aramco’s stock market debut is a big deal

Aramco IPO: The company is in control of the world’s second-largest proven crude oil reserves, and has pumped some 10 million barrels on average every day over the last several years. This is about a tenth of the world’s oil output.

By: Explained Desk | New Delhi | Updated: November 4, 2019 7:57:29 am
Saudi Aramco is an oil and natural gas giant that runs oilfields and natural gas fields across the kingdom and abroad

Saudi Arabia has finally approved the stock market debut of the giant state-owned oil producer, Saudi Aramco, probably the world’s most profitable business enterprise. This is expected to be the world’s biggest ever Initial Public Offering (IPO).

What is Saudi Aramco?

The company, which is officially known as the Saudi Arabian Oil Company, is an oil and natural gas giant that runs oilfields and natural gas fields across the kingdom and abroad, and is indisputably the crown jewel of Saudi Arabia’s economy. It has subsidiaries all over the world.

Aramco is in control of the world’s second-largest proven crude oil reserves, and has pumped some 10 million barrels on average every day over the last several years. This is about a tenth of the world’s oil output.

Aramco reported a revenue of $388 billion in 2018 (or over a billion dollars a day), and its net income of $111 billion last year was more than that ExxonMobil, Shell, BP, Total, and Chevron combined, and twice the profit of Apple Inc. In the first six months of 2019, it earned nearly $47 billion.

The company that is said to employ 70,000 people globally is fully owned by the Saudi Arabian government, and its running is overseen by the Ministry of Energy in Riyadh, which is under the charge of Abdulaziz bin Salman bin Abdulaziz Al Saud, a son of the kingdom’s King Salman.

How much will Aramco sell?

It is not known as yet. In its announcement of November 3, the country’s Capital Market Authority (CMA) only said that the CMA Board had “issued its resolution approving (Saudi Aramco’s) application for the registration and offering of part of its shares”, and that “the Company’s prospectus will be published prior to the start of the subscription period”.

Trading is expected to begin in December. Bankers on the transaction have told the Saudi government that investors are likely to value the company at about $1.5 trillion, The New York Times reported, quoting people briefed on the matter. The Chinese e-commerce giant Alibaba had raised nearly $22 billion in one day in 2014, the IPO record so far.

That said, Aramco’s IPO may well fall short of Saudi Arabia’s own expectations. When Crown Prince Mohammed bin Salman, the country’s de facto ruler, announced Aramco’s IPO plans in 2016, he had said that the company could be valued at $2 trillion. He had said that the IPO would come in 2017, and that shares would trade on both international stock exchanges and in Riyadh.

In any case, only a very small share of the company is expected to be made available — estimates have ranged between 3 per cent and 5 per cent.

What will Aramco do with the money that it raises?

Much of the IPO proceeds are expected to flow into Saudi Arabia’s Public Investment Fund, a sovereign wealth fund that MBS wants to use as his vehicle to take the kingdom away from its dependence on oil.

The Public Investment Fund has made investments in Uber, renewable energy, and real estate ventures that are aimed at creating employment for Saudis. The new city of Neom is planned in the northwest of the country, for which some $500 billion will be needed from the Public Investment Fund and other investors over time.

Aramco is also buying a 20 per cent stake in Reliance’s oil refinery and chemical business at an enterprise value of $75 billion — among the biggest foreign investments in India.

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