Saudi Aramco is the state-owned oil company of the Kingdom of Saudi Arabia.
It’s the biggest oil company in the world, helping the country become the biggest exporter of crude oil.
London, Hong Kong and New York’s stock exchanges are all wooing the oil powerhouse,
as Saudi Arabia’s government looks to take a part of the company public.
If that happens, it’s set to be the largest IPO in history.
Saudi Aramco was born in 1933 out of an agreement
between Saudi Arabia and California-based oil company Socal.
This agreement, like many granted to big U.S. and British oil companies at the time,
gave it the exclusive right to explore and extract oil on Saudi territory.
Originally called the California Arabian Standard Oil Company,
it was renamed the Arabian American Oil Company in 1944, or as we now know it, by its acronym Aramco.
For years, Aramco was run by a consortium of U.S. oil companies
including the predecessors of Chevron, Texaco and Exxon Mobil.
But following the creation of OPEC, Saudi Arabia and several other oil producing countries
began nationalizing their natural resources.
By 1980, the Saudi government had completed its buyout of Aramco’s assets,
eventually creating the Saudi Arabian Oil Company in 1988.
Saudi Aramco’s main business is pumping oil and then selling it around the world
to customers in places like Japan, the U.S. and China.
Aramco reports vast oil reserves, which when compared to the largest energy companies,
make them one of the biggest players in the world energy market.
Beyond drilling, the company also refines crude into oil products like gasoline and chemicals.
And in 2012, Aramco launched a new trading arm, which it says buys and sells
about 1.5 million barrels of chemicals and polymer products every day.
This helps keep more of that revenue in house, by reducing its reliance on outside traders.
Working out Aramco’s revenues, however, is a little more difficult.
The sovereign-owned company has never published a financial report.
Saudi officials say Armaco is set for a record $2 trillion valuation.
But not everyone agrees, with some analysts slicing that valuation in half.
A $2 trillion valuation means Aramco’s market cap dwarfs the likes of Microsoft, Alphabet
and the world’s most valuable publicly traded company, Apple.
This financial strength was emphasized in a leaked earnings report,
revealing a net income of $33.8 billion for the first half of 2017.
The report, which was disputed by the company, showed they earned
more than four times Exxon Mobil, the world’s biggest energy company by market cap.
The report could offer potential investors a better understanding
of the scale of Saudi Aramco ahead of its eagerly anticipated IPO.
Aramco is expected to offer about 5% of the company to investors, with the proceeds from
the sell off to be funneled into non-oil sectors such as tourism, healthcare and mining.
Aramco says it will list its public shares on the Saudi domestic stock exchange, the Tadawul.
An international option is "under active review."
But concerns about whether the Tadawul can manage such a large offering
has given global bankers and exchanges around the world the motivation
to continue to lobby Aramco to also list with them.
The U.K.’s Financial Conduct Authority even created new rules
that allow sovereign-controlled companies such as Aramco to achieve a premium listing
on the London Stock Exchange, without following the usual rules and practices.
When the IPO will take place is also unclear.
Some analysts say the reality is that Riyadh is in no rush
to privatize their crown jewel as oil prices rise once again.
There are also some within the Saudi government, that doubt the logic behind privatization.
Critics also believe that peak oil demand is a long way off
and that selling, even a small part of Aramco, is a bad move.
Helping decide when and where Aramco’s historic IPO happen
are CEO and President Amin Nasser and Saudi Energy Minister Khalid al-Falih.
But it’s the crown prince, Mohammed bin Salman who will have the final say.
The IPO is a big part of bin Salman’s Vision 2030
and its effort to diversify Saudi Arabia’s oil dependent economy.
Yet while the young heir is trying to move his country's economy away from hydrocarbons,
Aramco’s $2 trillion valuation will only be achieved if the company can show that their fossil fuel reserves
that they're trying to diversify away from, are still worth investing in.
The trillions of dollars Riyadh is hoping to raise from the IPO
would in theory increase support for privatizing more of its economy.
But it could also be critical for the future stability of the kingdom.
Its success will ensure the ruling royal family’s ability to maintain their social contract with its people,
generous state handouts in return for political loyalty.
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