The markets are awaiting what is expected to be the biggest public offering in history.
Saudi and Foreign investors stand in front of the logo of Saudi state oil giant Aramco during the 10th Global Competitiveness Forum on January 25, 2016, in the capital Riyadh. Saudi Aramco is preparing a global public offering that could be the largest in history. (FAYEZ NURELDINE/AFP/Getty Images)
The giant going public is Saudi Aramco, the national oil company of Saudi Arabia. It is expected to have a $2 trillion value, more valuable that ExxonMobil, Apple or Alibaba. This week Aramco named J.P. Morgan, Morgan Stanley and HSBC as the lucky underwriters for its offering.
It is unclear where shares will be listed though New York has been rumored. Regardless, investors may have to wait another year, or two, before Aramco is ready to go public.
Here is a better look at Aramco and what its IPO means for investors.
What are the details on the IPO?
The Saudis plan to offer up to 5% of Aramco in the IPO, at a predicted price of $100 billion. Some recent reporting has cast doubt on the high valuation but those calculations overemphasize current tax structure and overlook Aramco’s downstream business.
J.P. Morgan (Aramco’s longtime commercial banker) and Michael Klein (formerly of Citigroup) have been advising Aramco on the financial restructuring that is necessary for the process. Boutique investment firm Moelis was recently selected as the independent advisor for the IPO, and J.P. Morgan, Morgan Stanley and HSBC were recently named as underwriters for the IPO.
Initially, the IPO was expected to take place in early 2018, but the expected date has since been pushed off to late 2018 or early 2019. This is likely due to Aramco’s desire to complete the financial restructuring process to make the company more attractive to investors.
Visitors stand and watch stock movements displayed on large video screens inside the Saudi Stock Exchange, also known as the Tadawul All Share Index in Riyadh, Saudi Arabia, on Monday, Nov.28, 2016. (Simon Dawson/Bloomberg
There are some concerns that Aramco will not meet the strict standards for an oil company to list on the NYSE. SEC regulations would likely compel the company to divulge information about Saudi Arabia’s oil reserves that the Saudis consider national security secrets.
What effect will the IPO have on oil markets?
Investors will be looking most closely at a set date for the IPO. Markets expect Aramco, through Saudi Arabia and OPEC, will seek to increase the price of oil before the IPO to increase the proceeds from the IPO. This is because Saudi Arabia is the single most powerful country in OPEC.
What’s the history of Aramco and how did it get so big?
Aramco was originally an American company. The company was originally founded by Standard Oil of California (now Chevron) and originally named the California Arabian Standard Oil Company (CASOC). It secured a concession from the King of Saudi Arabia in 1933 to look for oil. The company discovered oil in 1938 on Saudi Arabia’s eastern coast. By 1948, it had been renamed the Arabian American Oil Company (Aramco) and was co-owned by Standard Oil of California, Texaco, Standard Oil of New Jersey (now ExxonMobil) and Standard Oil of New York.
Unlike other national oil companies in the Middle East and Latin America, the Saudis did not nationalize the company by force or fiat. Starting in 1972, the Saudi government began purchasing shares of the American-owned Aramco until, in 1980, it acquired the entire company. Aramco remained an American company until 1988, when the Saudis formally transferred ownership to Saudi Arabia and renamed the company Saudi Aramco. For practical purposes, this legacy means that Aramco has retained much of the managerial structure and operational habits of its American past.
A picture taken on May 10, 2016 shows over Shaybah, the base for Saudi Aramco's Natural Gas Liquids plant and oil production in the surrounding Shaybah field in Saudi Arabia's remote Empty quarter desert close to the United Arab Emirates, on May 10, 2016. (IAN TIMBERLAKE/AFP/Getty Images)
Aramco currently has a production capacity of 12 million barrels of oil per day and rights to at least 260 billion barrels of recoverable oil owned by Saudi Arabia.
Saudi Aramco was once American owned? Is it run like an American oil company?
Yes, in fact, Aramco’s management structure is derived from ExxonMobil. It was even registered in the state of Delaware until 1988. The company is responsible for all upstream, midstream and downstream oil and gas operations in Saudi Arabia. This includes vast oil exploration, production operations (onshore and offshore), pipelines, processing plants, refineries, tankers, marketing, sales and research and development. In addition to its oil production (upstream), the company also has an extensive network of downstream operations at refineries and holding facilities worldwide. Aramco also participated in a variety of joint ventures in refining and petrochemical operations in Saudi Arabia and across the globe.
Who works at Aramco?
Since the 1990s, Saudi Aramco’s employees have been majority Saudi, with many educated overseas. However, the company does continue to employ many Americans, Europeans and Asians in its global and Saudi operations. The company employs both men and women, although women are rarely seen holding management positions. Many Saudis employees were educated abroad – especially at American schools. One former Saudi CEO is a graduate of Texas A&M and another is a graduate of Lehigh University.
Amin al-Nasser, CEO of state oil giant Saudi Aramco, delivers a speech on October 11, 2016 during the 23rd World Energy Congress in Istanbul. (OZAN KOSE/AFP/Getty Images)
Who runs Aramco?
Saudi Aramco is currently owned by the Saudi government but is managed by a board of directors that includes both Saudis and foreign nationals. The CEO is Amin Nasser, who was previously a vice-president of upstream operations. The board of directors makes decisions regarding company strategy and direction, which are approved by a government council.
Khalid al-Falih, Saudi Arabia's Minister of Energy, Industry and Mineral Resources and chairman of Saudi Aramco speaks to reporters at an OPEC meeting. (Author's Collection)
Saudi Arabia’s overall oil strategy, including oil production rates, is managed by the Minister of Energy, Industry and Mineral Resources, Khalid al-Falih. Al-Falih’s position is part of the government, but he is the immediate past CEO and also the current chairman of Aramco.
What is Aramco’s relationship with its government?
The company is an independent entity in Saudi Arabia. Its facilities are largely immune from Saudi Arabia’s strict social codes. For instance, women are free to drive inside the city of Dhahran, where Aramco’s headquarters are located.
Revenue received by the government from Aramco is responsible for funding most of Saudi Arabia’s operating budget. According to the company’s CEO, Aramco pays royalties to the Saudi government and an 85% income tax rate. It also provides other Saudi companies (utilities, manufacturers) with below-market-priced oil and natural gas.
OPEC headquarters in Vienna. (Author's Collection)
What is Saudi Aramco’s relationship with OPEC?
As a company, Aramco is not active in OPEC, because OPEC is a cartel of countries that export petroleum. Saudi Arabia, on the other hand, is the most powerful single country in OPEC, because it controls the largest easily recoverable most oil reserves of any country in the world.
However, Saudi Arabia owns Aramco, so their interests run parallel.
What does Saudi Arabia plan to do with the money?
The Aramco IPO is part of a larger national transformation plan that young Deputy Crown Prince (the second in line for the crown) has engineered. This plan, called Vision2030, encourages the Saudi economy to diversify and reduce its economic dependence on oil and gas. The Saudi government intends to use the proceeds from its 5% sale of Aramco to fund investments in its massive Public Investment Fund (PIF).