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Saudi Aramco IPO: “This is the absolute mother of all oil and gas companies.”

PortandTerminal.com, November 4, 2019

Aramco announces plans to list shares on Riyadh stock exchange. The IPO is key to the Crown Prince’s grand plan to cut the Kingdom’s reliance on oil revenue.

RIYADH, SAUDI ARABIA – Saudi Aramco has confirmed it is planning to list on the Riyadh stock exchange, in what could be the world’s biggest initial public offering (IPO). Why are they doing it?

Saudi Vision 2030

Oil is king in the Kingdom of Saudi Arabia comprising 30-40 percent of the country’s real GDP. Note that this doesn’t include the proportion of the economy that is also dependent on the oil distribution, another large slice of the economy. Look around your home right now. How many products do you own that were made in Saudi Arabia? Probably none. Oil and gas are pretty much all they have to sell to the world.

Decreasing its dependence on oil resources though has been one of the goals of the government since the 1970s.

The Saudi Vision 2030 is a plan to reduce Saudi Arabia’s dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation and tourism.

The Aramco IPO is a cornerstone of Prince Mohammed’s Vision 2030 plan to make the Saudi economy ready for the post-oil era.

The 2030 goals include reinforcing economic and investment activities, increasing non-oil industry trade between countries through goods and consumer products, and increasing government spending on the military, manufacturing equipment and ammunition.

As we’ll see below, Saudi Arabia’s Aramco has massive reserves of oil and generates billions of dollars a year in profit. Oil and Aramco have fueled decades of prosperity in Saudi Arabia.

When money doesn’t matter

Nothing lasts forever though. Some estimates suggest that the company’s reserves will last for just another 90 years at its current rate of production. What comes after that?

The Aramco IPO is about planning for what comes next in Saudi Arabia’s post-oil economy.

Saudi Aramco: World’s most profitable company

Aramco made profits of $304 million dollars PER DAY in 2018 making it the world’s most profitable company

Aramco is the most profitable company in the world by a long-shot. The company made profits of $111 billion in 2018 making it more profitable than Apple Inc., Google’s parent Alphabet Inc. and Exxon Mobil Corp. combined.

The numbers are just too big to get your head around. Aramco makes $304 million profit EVERY SINGLE DAY (see infographic above). When translated to a more manageable scale, that works out to $3,519 per second. In the three minutes or so you might spend reading this article Aramco will make over $633 thousand dollars in profit.

This is the absolute mother of all oil and gas companies

David Hunter, Director of market studies at Schneider Electric

Saudi Arabia has the second-biggest oil reserves in the world after Venezuela, according to the Energy Information Administration. It is also second in production, after the US.

Being second though is just fine for Aramco because it has two things working for it that other oil companies do not. Firstly, Armaco has a monopoly on Saudi Arabia’s massive oil and gas reserves and secondly, the oil it extracts is extremely cheap to get out of the ground.

Bloomberg reports that Aramco is able to extract its oil for about $2.80 per barrel. That’s less than half the cost of its nearest competitor, EQUINOR ASA of Norway, and just a fifth of Exxon Mobile Corp’s extraction cost.

Saudi Arabia’s oil is of high quality and incredibly cheap to extract

When it costs less than $3 to get a barrel of oil out of the ground and you can turn around and sell it for $60-$70 a barrel, that’s a formula for wealth that would make most cocaine cartel kingpins blush. Put simply, Aramco is a money-making machine.

“It’s essentially the world’s largest unquoted company; it’s a massive global oil producer,” said David Hunter, director of market studies at Schneider Electric.”This is the absolute mother of all oil and gas companies.”

Aramco’s roots

Explorers from the Rockefeller family’s Standard Oil Company struck oil in Saudi Arabia in 1938. The venture became known as the Arabia American Oil Company and crude oil production hit 500,000 barrels per day in 1949.

By 1980, the Saudi government had bought out all the original shareholders and owned 100% of the company. Eight years later, the Saudi Arabian Oil Company (Saudi Aramco) was officially established.

Fast forward to 2019, Aramco maintains some 260 billion barrels in proven oil reserves, the second-largest in the world after Venezuela, in addition to 300 trillion cubic feet of gas. In 2019 it produced 12 million bbl of oil a day (Source: EIA).

How much is Aramco worth?

Aramco is probably going to end up being worth less than Prince Mohammed (aka MBS) had hoped it would be.

Bankers have told the Saudi government that investors may value the company at around $1.5 trillion, people briefed on the matter said previously. That would make Aramco the most valuable public company in the world, surpassing the current leader, Apple.

When MBS first announced plans to take the company public in 2016, he said that 1) the company would be valued around $2 trillion, 2) that the offering would take place by 2017 and that 3) its shares would trade on a premier international stock exchange like New York, London or Hong Kong, as well as the Tadawul in Riyadh.

So far MBS has been wrong on the date of the IPO and the stock exchanges that it will be listed on. He’s probably going to be wrong on the valuation as well.

The smart money is saying that Saudi Aramco will probably end up being worth about $1.2tn.

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