Saudi Aramco, World's Most Profitable Company, Will Make First Public Offering

Nov 3, 2019
Originally published on November 4, 2019 8:04 am

The world's most profitable company will make its first public stock offering next month, in what could be the biggest IPO ever.

Saudi Aramco, the oil giant owned by the Saudi government, said on Sunday it will sell an unspecified number of shares, thought to be between 1% and 3% of the company. It did not specify a price range.

The company's initial offering will be on Saudi Arabia's Tadawul exchange. "We are proud of the listing of Aramco," said CEO and President Amin Nasser said. "It will increase our visibility internationally."

It has taken years to get to this moment. Saudi Crown Prince Mohammed bin Salman said in 2016 that he wanted the company to go public in 2017, and that it would be valued at $2 trillion. But getting its books ready has taken until now, and bankers have advised that the valuation should instead be around $1.5 trillion.

Aramco supplies about 10% of the world's crude oil. In 2018, the company made $111 billion. That's more than J.P. Morgan Chase, Facebook, ExxonMobil and Google parent company Alphabet put together, as CNBC pointed out.

The firm's finances have long been guarded, but it began sharing its numbers in preparations for the IPO.

Its disclosures show that it costs Aramco $2.80 to get a barrel of oil from the ground, which it can then sell for $62 per barrel, according to The Guardian.

"It produces oil for so much less than anyone else out there," says Ellen Wald, author of Saudi, Inc., a book about the history of Saudi Arabia and Aramco. "I mean in the United States a fracking company is lucky if it can break even at $50 a barrel."

That's just one part of what makes Aramco so profitable. The company also benefits from investments it has made in its infrastructure, which makes it cheap to pump its oil. Then there's the accessibility of its oil reserves.

"These are the largest conventional oil resources on the planet," Wald says.

The public offering is part of an effort by the crown prince to diversify Saudi Arabia's economy and make it less dependent on oil. The move comes less than two months after Aramco's oil facilities were attacked by drone strikes, which for a time halved the country's oil exports. Yemen's Houthi rebels claimed responsibility, but Saudi Arabia pointed the finger squarely at Iran.

Those attacks, among other geopolitical issues, have raised questions about the safety of an investment in Aramco.

Credit rating agency Fitch recently downgraded Saudi Arabia's rating from A+ to A, citing "increased geopolitical and military tensions in the Gulf region," in addition to "the vulnerability of Saudi Arabia's economic infrastructure, and continued deterioration in Saudi Arabia's fiscal and external balance sheets."

Aramco chairman Yasir al-Rumayyan downplayed those concerns at a press conference Sunday.

After the attacks on its oil facilities, "oil prices went up the first two days by about 20%. Then it came down by 10%," Rumayyan said. "We have one eighth of the oil production in the world, and the oil traders saw this as a non-event. That means it is really safe. That's what the money is saying."

For the people of Saudi Arabia, the IPO is a huge deal.

"This is their crown jewel," says Wald. "Many Saudis see this as an opportunity to actually invest in the incredible natural resource that was endowed to their country."

Saudi investors will be incentivized to buy: They'll be eligible for one extra share for each 10 they buy within the first 180 days.

But for investors elsewhere, the prospect of buying Aramco shares may be more complicated. The company is essentially owned by the Saudi royal family. In September, Crown Prince Mohammed belatedly acknowledged that he was accountable for the October 2018 murder of journalist Jamal Khashoggi because "It happened under my watch," though he did not accept responsibility. The country only lifted its ban on women driving last year, and continues to have a guardianship system that limits women's rights.

And then there's Aramco's environmental record. An investigation by The Guardian found that the company is responsible for 4.38% of the world's carbon emissions since 1965.

With all that in mind, some investors may not want their pension funds to buy shares of Aramco stock.

"People have issues with Saudi Arabia: with their treatment of women, their issues with human rights. They have issues with fossil fuels," Wald says. "So people should be aware that this is happening and that this is something that can touch their investments, even if they don't know it. Even if they haven't actively decided to go into this."

But no matter what, Wald predicts the IPO will be a historic moment.

"It will also be the first time that people get a chance to really see Aramco's books," she says. "It's long been this kind of shadowy, mysterious company that has held its secrets very close to its chest. And the idea of of getting inside that and taking a look or a peek inside is really fascinating to a lot of people."

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DAVID GREENE, HOST:

So the world's most profitable company is not Apple or Google or Walmart. It is Saudi Aramco, the oil giant that's owned by the government of Saudi Arabia. And that company will make its first public offering next month. NPR's Laurel Wamsley tells us what this means.

LAUREL WAMSLEY, BYLINE: When Saudi Aramco CEO Amin Nasser refers to the company's current ownership, he speaks in the singular.

(SOUNDBITE OF ARCHIVED RECORDING)

AMIN NASSER: Our shareholder.

WAMSLEY: That shareholder is the Saudi royal family. But Saudi Aramco is no vanity project. The company made over $100 billion in profit last year, and it supplies one-tenth of the world's crude oil. That makes Aramco's announcement that it would be selling a small slice of its shares a very big deal.

(SOUNDBITE OF ARCHIVED RECORDING)

NASSER: We are proud of the listing of Aramco. It will increase our visibility internationally. We are a very strong company.

WAMSLEY: Aramco's valuation is estimated by some to be about $1.5 trillion.

ELLEN R WALD: It's a massive, massive company.

WAMSLEY: That's Ellen R. Wald, author of a book about Saudi Arabia and Aramco called "Saudi, Inc." Aramco will debut next month on a Saudi Arabian exchange rather than on a bigger market in New York, London or Hong Kong. That will shield the firm from tougher disclosure requirements and shareholder lawsuits, but not being in a bigger exchange will limit the pool of capital Aramco can access. The disclosures Aramco has made to prepare for the IPO have revealed a lot that was unknown about the company's finances and how it can be so incredibly profitable.

WALD: It produces oil for so much less than anyone else out there. In the United States, a fracking company is lucky if it can break even at $50 a barrel. Aramco is getting oil out of the ground for something like $2.84.

WAMSLEY: Saudi Arabia is blessed with highly accessible oil reserves. The company has also invested in infrastructure that makes it cheap to get the oil from the ground. The IPO announcement comes less than two months after Aramco's oil facilities were struck by drones in an attack that Saudi Arabia blamed on Iran. The country's oil output was temporarily cut in half by the attack and led to short-term price fluctuations. But Aramco Chairman Yasir Al-Rumayyan called that a non-event financially, saying futures traders barely took notice.

(SOUNDBITE OF ARCHIVED RECORDING)

YASIR AL-RUMAYYAN: And that means it is really safe. That's what the money is saying.

WAMSLEY: Aramco's big profits will attract qualified investors from around the world. Wald says that means that lots of people may end up investing in Aramco without being aware of it, say if their pension fund decides to buy in.

WALD: For some people, that could really be a problem. People have issues with Saudi Arabia, with their treatment of women, their issues with human rights. They have issues with fossil fuels. So people should be aware that this is happening and that this is something that can touch their investments even if they haven't actively decided to go into this.

WAMSLEY: And while the IPO means that investors can buy Aramco, their slice of the pie will be small for now. That single shareholder, the Saudi kingdom, is expected to sell no more than 3% of the company. Laurel Wamsley, NPR News.

(SOUNDBITE OF L'INDECIS' "STAYING THERE") Transcript provided by NPR, Copyright NPR.