The Mammoth IPO of Saudi Aramco

The State owned oil & gas company of Saudi Arabia; Saudi Aramco or officially known as The Saudi Arabian Oil Company on 3 November 2019 announced that it would be bringing out its maiden Initial Public Offer (IPO) later during the month with listing and commencement of trading to take place in December of 2019. What’s special about this IPO is the sheer size of this offer. The company is offering only about 1.5 per cent of its shares for subscription at a valuation that puts the entire value of the company close to US$1.71 trillion.

The history of the company dates back to 1938 when California-Arabian Standard Oil Co, a wholly owned subsidiary of Standard Oil of California, found oil in the Dhahran region of Saudi Arabia. Since then the has only increased in size finding more gas fields in Saudi Arabia and investing in oil and gas assets abroad. The company was however, completely taken over by the Saudi Arabian government in 1976 which was followed by the complete takeover of all its assets by The Saudi Arabian Oil Company in 1988 which was created by a royal decree by the Saudi King just for this purpose. The company over the years has been one of the largest and most profitable companies in the world exerting significant influence on the world price and supply dynamics of both crude oil and natural gas. The company is headquartered in Dhahran in Saudi Arabia where it first found oil. The company currently has five refineries operating in Saudi Arabia namely; The Jazan Refinery, The Jeddah Refinery, The Ras Tanura Refinery, The Riyadh Refinery and The Yanbu Refinery.

As of 2019 the company is the largest integrated oil and gas company of the world ahead of several American and corporations listed in other advanced countries. The company produces close to 13.2 million barrels of crude oil equivalent per day which is almost equivalent to one eighth of the per day production in the world. As of December 2018, the company had a reserve of 261.5 billion barrels of crude oil, 36.1 billion barrels of NGL and 233.8 trillion standard cubic feet of natural gas within the Saudi Arabian Kingdom. Other than that, the company has several other interests overseas where it is either the exclusive investor or investment has been made alongside a foreign entity. Â The company is present in all three streams of the petroleum industry (upstream, mid-stream and downstream). It not only produces crude but also refines it and markets it. It is the exclusive supplier of oil and gas in the Kingdom of Saudi Arabia. The company also has a significant petrochemical business, the company produces basic chemicals such as olefins, polyolefins, basic aromatics to more complex chemicals like synthetic rubber, polyols and isocyanates. The company, by the mid of 2020, plans to complete acquisition of 70% equity interest in SABIC, another Saudi Arabian company mostly into petrochemicals. Â Following the acquisition Saudi Aramco will become the largest net producer of ethylene in the world followed by becoming amongst the four top producers of polyethylene, polypropylene and monoethylene glycol in terms of production capacity. SABIC has operations in over fifty countries and other than the above it also produces methanol, MTBE, engineering plastics and other specialist petrochemical items.

The company’s major clients include countries like China, India, rest of South Asia and The United States of America to name a few. Over the years the company has expanded its presence in the South Asian continent which is fast emerging as one the highest growth geographies in the world. The company has also made significant investments in its distribution infrastructure of pipeline and terminals to support it in its sales and marketing activities. Other than that, the company’s corporate offices provide all ancillary functional support like that of finance, legal, corporate affairs and human resources to all its operational unites located in Kingdom of Saudi Arabia and elsewhere.

For the first half of the year (period ended June 30, 2019) the company was able to generate SAR 196.7 billion of net cash from operating activities which is equivalent to US $52.5 billion and SAR 142.4 billion in free cash flow which is equivalent to US $38.0 billion. During the previous year of 2018 the company had generated net cash from operating activities of SAR 453.7 billion which is equivalent to US$121.0 billion and a free cash flow of SAR 321.9 billion which is equivalent to US$85.8 billion. The company has a gearing of 2.4 per cent as on 30 June 2019 and -8.6 per cent as on 31 December 2018 (net cash position on this date).

The total sales revenue of the company during the six-month period ending on 30 June 2019 was SAR 614.556 billion which is equivalent to US$ 163.882 billion, and for the year ended 31 December 2018 the total sales revenue of the company was SAR 1,334.778 billion which was equivalent of US$ 355.940 billion. The net income of the company for the six-month period ending on 30 June 2019 was SAR 175.871 billion which is equivalent to US$ 46.899 billion and for the year ended 31 December 2018 the net income of the company stood at SAR 416.518 billion which is equivalent to US$ 111.071 billion.

The total asset of the company held on 30 June 2019 were valued at SAR 1,424.431billion which is equivalent to US$ 379.848 billion and the total assets held by the company as on 31 December 2018 were valued at SAR 1,346.168 billion which is equivalent to US$ 358.978 billion.

The idea behind this IPO has been to raise funds in order to support other non-oil ventures in the middle eastern nation to create employment and diversify away from oil and its closely associated industries in order to make Saudi Arabian economy viable in the long run. However, some observers and capital market players are terming this IPO as too gigantic, considering that the funds raised are not going to be used for the growth and expansion of the company. There are speculations however, that when the company lists on the Saudi Arabian Stock Exchange “Tadawul” it could beat the US$ 25 billion opening of Alibaba on the New York Stock Exchange in 2014.