Saudi values Aramco at $2 trillion for an IPO, but why are they selling?

Published by Gaurav Gupte on

The World’s largest oil & gas company, The Saudi Arabian Oil Company – Aramco, has decided to have an IPO in 2018 and it believes that it can mop up $ 2 trillion through the offer.
The Saudi Aramco is the crown jewel of the Kingdom of Saudi Arabia as it controls the largest known oil reserves in the World. It is currently believed to be valued at $10 trillion and Saudi Arabia is willing to let go of a stake of 5-10 percent through the IPO. The newly listed company will be miles ahead of Apple in terms of being the most valuable listed company. The Kingdom of Saudi Arabia has oil reserves of more than 260 billion barrels of crude oil and more than 50 billion barrels of proven natural gas reserves. These are expected to last for another 70 years. Crude oil sales account for over 75% of the nation’s export earnings. Aramco oversees oil and natural gas extraction, refining and export. In addition to this it’s also responsible for managing the oil fields owned by the Kingdom.  
The actual parts of the company which will be up for the IPO are yet to be decided, but investors are very sure that the oil fields will not be a part of that deal. What would ensue for most oil company IPOs would be:

  1. Independent verification of the oil reserves that Aramco claims to have for extraction and export.
  2. Historical data to understand the performance of Aramco over the years.
  3. Aramco’s performance against it’s competitors
  4. Pricing strategy for the export of its products.
  5. Details of all financials as per global accounting standards.

Saudi Arabia is a member of the OPEC a cartel of Oil Producing & Exporting Countries that meet regularly to keep oil prices artificially high. They ignore the basics of free markets completely. This is one question many analysts raise. Will Saudi Arabia be willing to leave this cartel to ensure greater transparency and ease of doing business?
These would be followed normally for any other Oil & Gas company, but would most likely be bypassed for Aramco, considering that it is the most valuable company which is owned by a Royal family. Any investor would be willing to look past these and get their hands on a share of Aramco.
The major question is why is the cash rich Saudi Arabia selling a part of their crown jewel? Aramco had a revenue of $ 378 billion in 2014, surely they don’t need any working capital!! The reason is the recent fall in oil prices. Global oil prices have seen 60% fall in price from a high of $115 per barrel. Obviously, they are feeling uncomfortable about losing 60% of their income from oil. Saudi Arabia depends heavily on oil for all its Governmental expenditure from defense to its daily administration. Although Saudi Arabia has a lot of cash reserves, its budget deficit has risen to a 16% in 2015. Saudi citizens depend on government jobs for their daily bread and butter and the government has had to cut those significantly.
The Royal family hired management consultants McKinsey to outline a vision for the Kingdom and a report which was submitted by McKinsey has apparently convinced the Royal family of the way ahead. A document titled Vision 2030 has outlined the need for Saudi Arabia to focus on encouraging private enterprise to grow and stabilize the economy in order to cushion it from any shocks that volatile oil prices may give them. A lesser dependence on oil is what the report underscores.
Which way will this actually take the Kingdom is yet to be seen, but I would go out on a limb to get those shares!!
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Categories: Energy


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