Saudi Aramco IPO

Aramco initial public offering (IPO) raised $26 billion and became the largest IPO ever. Company’s shares listed on Tadawul stock exchange. Saudi Aramco IPO prospectus gives insight into Company’s business, enormous profits, strategy, risks, perspectives, etc.

Aramco is the world’s largest integrated oil & gas company. In 2019 Company produced 13.2 million barrels per day oil equivalent ( out of which 10 million barrels of crude oil ). Company’s gross refining capacity (31 Dec 2018) of 4.9 million barrels per day, net refining capacity of 3.1 million barrels per day. Company operates in upstream and downstream segments.

Saudi Arabia’s Hydrocarbons Low mandates the Company to promote long term productive. As at 31 Dec 2018 Kingdom’s reserves consisted of 336.2 billion barrels of oil equivalent and 233.8 trillion standard cubic feet of natural gas. Aramco been granted exclusive rights (40 years) to explore, develop and produce country’s hydrocarbon resources. Company is required to meet the domestic demand for hydrocarbons.

Company’s portfolio included 136 fields with 498 reservoirs. Company’s upstream lifting cost is $2.8 per barrel of oil equivalent. Such a low cost of lifting per barrel is a huge advantage and mainly because of unique geological formations. The Government of Saudi Arabia determines the maximum level of crude oil production in order to maximize profitability. Aramco is the most reliable crude oil supplier, meeting 99.9% of it’s delivery obligations.

Company’s downstream segment provides opportunity to secure crude oil demand (38%). Company’s downstream investments mostly on areas of high-growth (Southeast Asia, India, China, Japan, South Korea). In first half of 2020 expected acquisition of 70% equity stake in SABIC. In April 2019 Company entered into purchase agreement to acquire 17% stake in Hyundai Oilbank from Hyundai Heavy Industries Holdings (South Korea). In August Company entered into non-binding letter of intend to purchase 20% stake in Reliance Industries Limited (oil to chemicals division).

In 2018 Company’s revenue and other income related to sales was $355 billion. In first 6 months of 2019 Company’s revenue and other income related to sales was $163 billion. In 2018 operating cost $143 billion, in first 6 months of 2019 operating cost was $71 billion. In 2018 net income $111 billion, in first 6 months of 2019 net income $46.8 billion.

Aramco risks:

• Crude oil supply and demand fluctuations. 57% of consolidated revenue and other income related to sales comes from sale of crude oil.
• Decision by Government and OPEC regarding production levels.
• Prices of alternative energy sources.
• Trading activities in crude oil commodity market.
• Possible political instability in downstream markets (especially Asia as it accounts for 37.2% of global refined product demand.
• Competition.
• Risks related to hydrocarbons reserves estimation.
• Operational risks, power shortage, accidents, equipment failure, etc.
• Insurance related risks (in case of significant losses insurance might not cover fully).
• Company’s growth related risks.
• Qualified workforce shortage.
• Risks related to litigations (violation of antitrust law mostly because of participation in OPEC).
• Acquisition related risks (SABIC stake, Reliance stake, Hyundai Oilbank stake, etc).
• Risk from operating in foreign countries (changes in law, tax regime, economic situation, currency fluctuations, crude oil demand, etc).
• US Dollar fluctuations (all oil prices counted in dollars).
• Sanctions related risks (mostly on countries where Aramco’s downstream operations).
• Risks related to chemicals and plastics regulations (especially worldwide movement against of using plastic and swap to biodegradable packaging).
• IT risks and cyber attacks.
• Risks related to managing public company.
• Risk related to equalization compensations (compensations from Government for domestic sale of hydrocarbons in order to cover country’s domestic needs).
• Climate change and increasing public awareness about gas emissions.
• Stability (or instability) of MENA region.
• Risks related to international shipment of hydrocarbons.
• Risks related to volatility of shares.

Global demand for hydrocarbons expected to grow. Demand for crude oil will rise from Asia, South America, Africa.

Till 2030 oil will remain main source of energy. Renewable energy sources will not significantly impact demand of oil.

Aramco IPO

Saudi Arabia Government expect Company’s valuation of $2 trillion. In worlds largest IPO company raised $25.6 billion. Highest achieved valuation is $1.88 trillion.

After Aramco IPO Saudi Arabia stock market grown 370% and became world’s 7th largest stocks market. Combined value of all listed company’s on Tadawul stock exchange around $500 billion, after Aramco combined value grown to $2.4 trillion.

Aramco IPO money will be transfered to Public Investment Fund and after will be invested in domestic economy for achieving diversification. In Tadawull All Share Index Company will have weight 8-9% (quite low index weight considered valuation). All banks that worked on IPO will be paid a combined $64 million (0.25% of total deal value).

There’s a lot of speculation over Aramco valuation ($2 trillion) but company granted exclusive right to produce hydrocarbons in Kingdom. Also every year proved hydrocarbon reserves increasing. It will be interesting to watch Aramco stock performance and farther ways how Saudi Arabia will diversify oil depending economy.

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