The Saudi Aramco IPO will be the worldās largest public offering ever, with valuations estimated as high as $2 trillion...
Thatās why weāve created this complete Saudi Aramco stock and IPO guide - to help you prepare for the biggest IPO in history.
That eye-popping valuation is why our energy investing expert here at Money Morning says everyone is going to want a piece of the stock.
Money Morning Global Energy Strategist Dr. Kent Moors says Aramcoās massive valuation āmakes the Aramco IPO uniquely important in the history of stock markets.ā
Just look at how it stacks up to the current record for an IPO. Less than three years ago, Alibaba Group Holding Ltd. (NYSE: BABA) went public and set the record for the largest IPO ever, amassing $25 billion in stock sales. Yet even a mere 5% offering of Aramco could potentially bring in $100 billion in stock sales, quadrupling Alibabaās record performance.
While investors clamor for a slice of Aramco stock as the Aramco IPO date of 2018 nears, thereās still plenty to learn about the company and its stock before it hits an exchange.
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This guide to the Saudi Aramco IPO will tell you everything you need to know about the Saudi Arabian oil company, including how much itās really worth, where it will be listed, and whether Aramco stock will be worth buying once it goes public.
And weāll start with how Saudi Aramco came to be the biggest oil company in the world...
What Is the Saudi Aramco Oil Company?
Aramco is the national oil company of Saudi Arabia, but it didnāt start out that way.
Aramco actually began as part of the Standard Oil Company of California (Socal), when Socal signed an oil contract deal with Saudi Arabia in 1933. The deal created the California-Arabian Standard Oil Company, which would eventually turn into the Arabian-American Oil Company ā Aramco ā in 1944.
The Saudi government eventually wanted a bigger slice of the profits pouring out of its own country. In 1950, Saudi Arabia demanded a renegotiation of the contract, with the Saudi government wanting 50% of the income from Aramcoās oil.
But the Saudi government wouldnāt stop there...
Starting in 1973, they began taking ownership of Aramco, starting with a 25% stake. By 1980, they owned 100% of the oil company.
And Aramcoās relationship with the Saudi government is precisely why itās so valuable now...
Because the Saudi government owns Aramco, the company has exclusive access to all of Saudi Arabiaās oil reserves. The countryās proven oil reserves are the second largest in the world, as Aramco controls an estimated 265 billion barrels of oil.
Oil supermajors like Exxon Mobil Corp. (NYSE: XOM) and Royal Dutch Shell Plc. (NYSE: RDS.A) - the two largest publicly traded oil companies in the world ā have to compete in different countries to gain access to oil. For example, in the United States there are over 150 oil companies competing for a slice of Americaās oil, according to Oildex.com.
Thatās why Exxon ā the United Statesā largest oil company - only controls around 24 billion barrels of oil worldwide. Thatās roughly 1/13th of Aramcoās oil, even though the United States is currently the worldās third-largest oil producer and has over 30 billion barrels of oil.
While access to Saudi Arabiaās oil is the reason Aramco is so valuable, Saudi Arabiaās reliance on revenue from oil is part of the reason itās moving toward an IPO...
Why Is Saudi Aramco Going Public?
Saudi Arabia says theyāre taking Saudi Aramco public to help diversify the Saudi Arabian economy, but the real reason is much more complicated than that...
On Jan. 6, 2016, Saudi Prince Mohammed bin Salman, the head of Saudi Arabiaās Council for Economic Development, announced Aramco would go public. The Saudi Prince told The Economist that an Aramco IPO was ābeing reviewed.ā
āI believe [an IPO] is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency,ā said bin Salman.
The then-29-year-oldās announcement came as a surprise to Aramcoās employees. Employees told Fortune in February 2016 that the IPO wasnāt being taken seriously within the company, and the sale of Aramcoās oil production division was āabsolutely unthinkable.ā
But bin Salmanās plan came in the middle of a global oil price collapse, one that was hurting the Saudi economy due to its reliance on oil.
After hitting a high of $107.04 in 2014, WTI crude oil prices plummeted 68% to $33.97 by Jan. 6, 2016. Between 2014 and 2016, Saudi Arabiaās GDP fell by more than 14%, throwing the country into a recession.
Even as oil prices have rallied since 2016 ā hitting $47.20 today ā Saudi Arabia and OPEC have struggled to push oil prices over $50 a barrel. The possibility of a return to $100-plus levels is slim.
On top of that, renewable energy is starting to compete with fossil fuels like oil.
Renewable energy accounted for 40% of the global growth in power generation in 2016, according to a study by BP. Similarly, the number of electric cars on the road more than doubled between 2015 and 2016, jumping from 1 million cars to 2.2 million last year.
The growth of renewable energy means fewer countries will be as reliant on oil. That means Saudi Arabia canāt expect to rely on oil revenue indefinitely, and the Aramco IPO will help the country raise money to reinvest in more diverse industries.
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Thatās why what Fortune reported as āabsolutely unthinkableā is happening. Aramco is planning to offer up 5% of the entire company to the public, and it plans to hit the stock market with the worldās biggest offering...
How Much Is Saudi Aramco Worth?
When Mohammed bin Salman first announced Aramcoās public offering, he said the Saudi oil company was worth a whopping $2 trillion.
With a $2 trillion valuation, Aramco would be bigger than rival supermajors Chevron Corp. (NYSE: CVX), BP Plc. (NYSE ADR: BP), Exxon, and Shell - combined.
That valuation is also why a 5% public offering, which is what the Saudi government is planning for, would bring in $100 billion. Again, that would quadruple Alibabaās record IPO from 2014.
But thereās reason to believe the Aramco valuation isnāt quite as high as the Saudis have told us...
Access to Saudi Arabiaās vast oil reserves is the main reason Aramco is so valuable, meaning the price of oil will affect the Aramco valuation.
While Prince Salman said Aramcoās valuation was over $2 trillion, that number could have come from a time when oil prices were over $100 a barrel.
Rystad Energy, an energy consultancy, says they value Aramco at $1.4 trillion, assuming oil hits $75 a barrel. In March, Bloomberg reported Aramcoās valuation was actually closer to $1 trillion.
The connection between Aramco and the government is also weighing down the valuation.
The Saudi government used to tax Aramco at a rate of 90%. Since the government owned Aramco, nearly all of the companyās money went to government funding.
But if the company is going to be owned by the public, even in part, an effective tax rate that high is unattractive. It means less money going back to investors and less money the company can use to grow.
Thatās why Saudi Arabia just slashed that tax rate to 50% in March 2017. While thatās a significant drop, itās still more than double what developed countries tax corporations. The OECD average corporate tax rate is 24.1%.
On top of that, Saudi Arabia is the de facto leader of OPEC. When OPEC cuts oil production, itās Saudi Arabia who leads the way. Under the current OPEC oil production cut agreement, Saudi Arabia is responsible for 40% of the cut, or about 486,000 barrels a day.
Even though the cut is meant to drive up oil prices, and higher oil prices help oil companies, shareholders might not be willing to tolerate a government controlling Aramcoās output.
In April, Aramco officials struggled to come up with a valuation higher than $1.5 trillion, āeven after factoring in a recent tax cut and other tools the government has to make it more attractive to investors,ā The Wall Street Journal reported.
While these concerns are unlikely to push Aramcoās valuation below $1 trillion, they show why no one can agree on a precise valuation for the oil company. However, even with a $1 trillion valuation, a 5% public offering would still bring in $50 billion, double Alibabaās IPO and still an all-time record.
We wonāt know how much Aramco is worth ā or what the Saudi Aramco stock price is ā until the stock begins trading. Thatās when weāll know how much investors are willing to pay for Aramco stock, and thatās what will determine Aramcoās market cap.
And to maximize Aramcoās market cap, Saudi Arabia is planning to sell shares of Aramco on a major Western stock exchange...
Where Will Saudi Aramco Stock Be Listed?
Listing Aramco on an exchange like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE) will give Aramco global visibility. And with more access to investors, it will help boost Aramcoās valuation.
But Aramco hasnāt decided where to officially list the company.
āThere has been an ongoing disagreement within both the government and the leadership at Aramco overĀ whereĀ the IPO should be issued,ā Moors said.
Aramco has narrowed down the possible exchanges to the NYSE, LSE, the Stock Exchange of Hong Kong, and the Singapore Exchange Limited. But, Aramco is likely to choose between the NYSE and the LSE, with a smaller number of shares listed on Saudi Arabiaās home stock exchange.
The reason choosing an exchange for the IPO is proving so difficult is the governmentās reluctance to agree to the transparency rules required to list on the LSE or NYSE.
The public transparency and financial disclosures required by the worldās leading stock exchanges mean Saudi state secrets could be exposed to the public. For example, Moors says the Saudi government keeps both the official number of its oil wells and the size of its oil reserves secret for strategic reasons.
If Aramco lists on the NYSE, that information could become public due to U.S. securities law. The SEC requires all information relevant to investors be published, plus the company has to file audited financial statements quarterly. The Saudi government wonāt be able to protect its information any longer.
But the LSE has offered Aramco a way out of its problematic connections to the Saudi government. The LSE may create a new listing structure that would allow Aramco to sell shares on the London exchange but wouldnāt force them to adhere to transparency laws.
This potential solution has attracted some parts of the Saudi Royal family, according to WSJĀø even as the LSE is taking criticism for giving Aramco special treatment.
Moors agrees.
āOf course, more than a few Saudi officials (at Aramco and elsewhere) have used both the UK and the LSE as a conduit for their own financial dealings,ā said Moors.
The NYSE isnāt out of the running, though. Because Brexit is creating uncertainty in the United Kingdom and detaching its financial network from Europe, an IPO on Londonās exchange might have less of a global impact than it would have two years ago.
Thatās part of the reason the LSE is willing to offer Aramco a special deal, too. Landing the Aramco IPO could help the LSE grow even as money moves to other European financial centers after Brexit. The Guardian reports Paris is already trying to lure British banks to Paris.
The decision over where to list the company is one reason we donāt yet know the Saudi Aramco IPO date...
When Is Saudi Aramco Going Public?
Aramco is planning for a 2018 IPO, but that will depend on where itās listed and how quickly the company can separate itself from the government.
Aramco CEO Amin Nasser told CNN in January 2017 that the company was still planning for an Aramco IPO date of 2018.
But Forbes reported in February that the IPO could be pushed into 2019, thanks to the difficult task of separating the company from the government.
When Aramco goes public, every investor will want shares of it in their portfolio. But weāll tell you whether that will be profitable for you...
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