Saudi Arabia’s Aramco – The Largest IPO in History

Remember when Apple eclipsed the $1 trillion market cap mark and it made headlines across the financial media? Yeah, it was a big deal and Microsoft eclipsed the trillion market cap back in April. Now the investment banking world is gearing up for an Initial Public Offering that is being priced between $1.5 trillion and $2 trillion.

Saudi Aramco, the state-owned oil company of Saudi Arabia, is going public and will be listed on the Saudi Tadawul exchange. Once listed, the company will become the world’s most valuable listed company. When you consider the reserves the company has and the amount of production the company is already doing, it warrants the title.

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A recent article from the Wall Street Journal listed the proven oil and gas reserves for various companies around the world. The reserves were listed in terms of the number of years of life of the reserves and Saudi Aramco has 52 years’ worth of reserves. By comparison, Exxon Mobil has 17 years’ worth of reserves and BP has 15 years’ worth.

Another bit of information that I found astonishing from the article was that the company “has produced one in every eight barrels of oil worldwide in recent years”. That is hard to fathom and between that production and the reserves—the valuation is warranted.

The company is being strategic with its listing and it is modeling itself after other oil and gas producers in terms of its dividend payouts. The company has stated that it will pay out $75 billion in guaranteed dividends in each of the first five years. If the pricing ends up coming in at $1.5 trillion, that would put the yield at 5%. Exxon Mobil’s current dividend yield is 5.15% and BP’s is 6.5%.

Here’s the scary part—the percentage of the company being offered to the public only represents approximately 5% of the company’s ownership.

Saudi Aramco has been incredibly profitable, producing $111 billion in net income in 2018 and $68 billion through the first nine months of 2019. According to Investopedia, that is the highest net income for any company in the world. Second place in 2018 was Apple with $59.5 billion and third place was the Industrial & Commercial Bank of China with net income of $45 billion. That’s right; Saudi Aramco earned more than the second and third most profitable companies combined.

As intriguing as the IPO is, there are definitely concerns about investing in the company. First of all, the listing being only on the local exchange will be a concern for some. When Prince Mohammed bin Salman announced the intention to take Saudi Aramco public back in 2016, his stated goal was to have it listed on one of the top global exchanges like the New York Stock Exchange or the London Stock Exchange.

Another concern for investors will be the volatility in the Middle East. The company had operations disrupted with a missile attack in September and that won’t be the last attempt. The region has been unstable throughout history and that in and of itself may keep some investors away.

The company is also susceptible to big swings in oil prices. Obviously, with the amount of reserves and production that Saudi Aramco controls, it could actually help stabilize oil prices to some degree. That might not go over very well with other OPEC members, but it certainly is a possibility.

Going back to the Wall Street Journal article, nearly half of the money raised from the IPO is expected to come from wealthy investors in Saudi Arabia. Smaller domestic investors are also expected to show great interest in owning shares of the company and Saudi Aramco has announced bonuses for investors that hold for at least 180 days.

The date of the IPO hasn’t been set yet, but the goal is for a December launch. Regardless of when the IPO actually launches, it is going to be interesting how well it is received by foreign investors.

Editor’s note: Just for context, in 2016, we wrote on Punching Bag Post about how Saudi Arabia had approximately $700 Billion in reserves and they were burning through it at a rate of about $12 Billion per month. They were due to go bankrupt within a few years, because of their largely socialist economy that was support millions but producing little.

Since then they had an episode where they locked dozens of Saudi billionaires in a luxury hotel and would not let them leave until they coughed up over $100 Billion.  This IPO is yet another effort to prop up a failing government system.

This will not help Saudi Arabia for very long. Either the price of oil has to increase substantially or Saudi Arabia has to do some major restructuring (which they have not done yet, it appears). Or they become Venezuela…

 

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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