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It's Official: Saudi Aramco to Become the Biggest IPO Ever

Nilanjan Choudhury

Saudi Aramco priced its initial public offering of three billion shares at 32 riyals ($8.53 a share), the top end of the expected range, raising $25.6 billion to pull off the biggest stock market floatation ever. The oil and gas juggernaut, which is set to trade on the Riyadh stock market, beat the previous record held by Chinese e-commerce behemoth Alibaba BABA, which raised $25 billion when it listed on the New York Stock Exchange in 2014. If underwriters exercise an option to sell more shares, the proceeds from the offering could be around $30 billion.

Here’s everything you need to know about the Saudi Arabian energy giant in one place.

Business Overview

Saudi Arabian Oil Company (Saudi Aramco) is the world's largest integrated energy firm. On an average, the state-owned oil and gas producer churned out a whopping 10 million barrels of oil each day during the six months from January 2019 to June 2019. Saudi Aramco is also a refining juggernaut, with a gross refining capacity of 4.9 million barrels per day.

Financial Performance

The company recently published its first-ever half-year financial results. For the six months that ended Jun 30, Saudi Aramco reported a slight decline in profits due to lower oil prices but net income – at $46.9 billion – still eased past the $20 billion+ for the likes of Microsoft MSFT and Apple Inc. AAPL during the same period. The so-called ‘Big Oil’ companies like ExxonMobil XOM, Chevron CVX and Royal Dutch Shell RDS.A – all carrying a Zacks Rank #3 (Hold) – are further down the pecking order. Importantly, the state-run titan raked in an astounding $38 billion in free cash flow.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

IPO Size

The company is targeting to sell 1.5% of its 200 billion shares on the local bourse at $8.53 apiece, which it says was oversubscribed 4.65 times. At that price, Saudi Aramco will be valued at a staggering $1.7 trillion but still below the $2 trillion level that Crown Prince Mohammed bin Salman was initially looking for. However, it will still be significantly higher than Microsoft, Amazon AMZN or Apple – the only other firms ever to have topped $1 trillion. Saudi Aramco is expected to begin trading at the Tadawul stock exchange on Dec 12.

Key Risks

For a primarily oil and gas business facing a weak commodity market, as well as the controversial aspects of climate change, there are a number of risk factors.

As is the case with other companies involved in exploration and production, Saudi Aramco’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.

During the first half of 2019, the Damman-based entity paid over $46 billion in dividends to its shareholder – the Kingdom of Saudi Arabia – including a special dividend of $20 billion. There are certain apprehensions regarding Aramco's monster dividend payouts to the Saudi government, especially with little prospect of oil prices moving much beyond $60 per barrel.

The recent attack on Saudi Arabia’s oil installations have raised the risk quotient associated with onshore oil production. In September, unmanned aerial vehicles struck Saudi Aramco’s Abqaiq plant – a key crude processing facility – and the Khurais complex, which houses the kingdom’s second-largest oilfield.

Finally, there is the climate change debate. Saudi Aramco is faced with the challenge of producing the most oil in the world and yet not to be seen as one of the world's biggest evils. The firm, which claims to be ‘the cleanest major oil company’ on the back of zero gas flaring and sophisticated field technology, will have to deal with pressure from environmentalists to cut emissions and curb climate change.

Outlook

It’s quite clear that Aramco's half-yearly numbers are a testament to the company's unmatched scale and earnings prowess. Agreed, there are worries related to Aramco's dividend payouts to the Saudi government, the latest financial results certainly tell us how sustainable the company’s business actually is – even in the face of the ongoing commodity price uncertainty.

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