News Release – November 2019: Read our views on why Saudi Aramco’s IPO will be historical by any measure

As the world’s most profitable company and largest oil producer globally, Saudi Aramco’s forthcoming IPO will be closely followed by global and regional investors. CEO Amin Nasser announced in September that “Aramco is ready for listing whenever the shareholder makes a decision to list”. Further announcements were made by Prince Abdulaziz, minister of energy, during the Future Investment Initiative in Riyadh which indicate that the IPO is likely to be launched by December.

The listing is expected to take place in the local Saudi Tadawul exchange and could be worth $40 Billion, far eclipsing the previous record of Alibaba when it raised $25 Billion in 2014. At a later stage, Aramco is expected to list more of its shares in one or several other global financial centers. These include London, New York, Hong Kong and even Tokyo, with the Tokyo Stock Exchange being the latest major exchange to launch a charm offensive to secure part of this landmark listing.

The gradual approach that the company is taking in listing its shares, as well as plans to list in multiple financial centers are warranted given the huge scale of Aramco. The company produces 1 in every 10 barrels of oil produced globally, which is more than double Exxon Mobil’s production, its closest competitor. Aramco also enjoys the lowest cost of production, and is therefore able to generate more profit per barrel than any other oil company. This combination of high margins and dominant scale is what makes Aramco such a unique strategic asset, and the world’s most valuable company.

Aramco’s profitability dwarves that of its peers. The company earned 111 Billion last year, which is greater than the combined profits earned by Apple, JPMorgan, Nestle and Airbus. With the recently announced base dividend of 75 Billion for 2020, Aramco annual dividends would surpass those paid by Exxon, Shell and Chevron combined. More importantly, this huge scale and profitability advantage is likely to be sustained for decades as Aramco’s total hydrocarbon reserves represent five times the combined reserves of the next five oil majors and imply a reserve life of 52 years.

The success of Aramco’s recent bond issue will certainly be a supporting factor in the upcoming IPO. When the company issued USD 12 Billion of bonds in April this year, it received more than USD 100 Billion in orders, with Aramco’s longest-dated 2049 bonds receiving the strongest demand. Typically, if a bond issue is twice oversubscribed, it is widely considered a success. With the issue oversubscribed more than 8 times, Aramco’s bond offering was truly exceptional. This success cemented the company’s reputation in global financial markets, and confirmed that Aramco is in a league of its own.

While the unique characteristics of Aramco are evident, investors are wary of the uncertain outlook for global oil demand. In the short term, the ongoing US-China trade war and a broad-based manufacturing slowdown may hit energy demand in the coming quarters. The elevated recession risks have capped oil prices in recent months despite significant supply shocks that would have normally led to sustainably higher prices. Moreover, small and opportunistic North American shale producers continue to take advantage of any spike in oil prices by ramping up production quickly despite their relatively high break-even costs. On the other hand, the upstream oil industry has been very cautious over the past five years in terms of capex spending especially for new projects which is likely to constrain supply growth in the coming years and therefore maintain a relatively balanced market….

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