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Saudi Aramco's IPO: What to Know About the World's Most Profitable Public Offering



Popquiz: What is the most profitable company in the world? Apple? Google?

No. The two don't even come close. The answer is Saudi Arabia's state oil company, Aramco. In 2018, Saudi Aramco made $ 111 billion in profits. The second most profitable company, Apple, made $ 60 billion that year.

3. November, Aramco officially announced the plan to go public for the first time in the company's 86-year history. And on November 17, the oil giant announced that the company could be valued at $ 1.7 trillion. Energy historian Ellen R. Wald joined today explained to explain why Aramco's original public offering (IPO) is such a big deal.

As the most profitable company in the world, she says, the company's stock exchange listing will set great records. And since it is the largest oil company in the world, it is likely that many everyday things we use ̵

1; from the plastic to the energy that fuels our cars – affect this company.

“In the United States,” Wald says as an example, “Aramco owns the largest refinery in the entire country. And it also owns Shell Gas Stations in the southeastern United States. So many Americans may be buying oil – or gasoline – made by Aramco, and they don't even know. "

But some say the timing of the Aramco IP couldn't be worse. One reason for that: Some people believe that the world has or will soon reach peak oil demand. Another, Wald explains, is" PR the nightmare "that Saudi Arabia created with the killing of Saudi dissident journalist Jamal Khashoggi:

[The killing of Jamal Khashoggi] definitely put investors and financiers to Saudi Arabia in general. The idea is that the money from this stock sale will go to support the Saudi Arabian monarchy that has done and continues to do a lot of terrible things, both in terms of human rights … And then many people out there look at it and say, "No, I don't touch this because I don't want to help these people."

To understand the significance of Aramco's upcoming IPO, you must know the company's history, and if you want to learn all about it, here is a lightly edited print of Wald's conversation with Today, Explained host Sean Rameswaram.

Subscribe to Today, Explained wherever you get your podcasts, including: Apple Podcasts Google Podcasts Spotify Stitcher and ART19 .


Sean Rameswaram

What really takes Saudi Aramco from an extremely profitable oil company to the most profitable company in the world?

Ellen Ward

The really important year here is 1972. The United States could no longer pump more oil to meet growing demand. So instead of meeting America's huge thirst for oil at that time, they had to import oil from elsewhere. And one of the major sources of that was Saudi Arabia. And Saudi Arabia pumped and pumped more to meet that demand. All these gas-guzzling cars, they met that demand.

And the Saudis took note of this. By the time the Minister of Oil, his name was Zaki Yamani, he and other oil-producing countries in the Middle East had already joined the cartel organization we now know as OPEC [the Organization of the Petroleum Exporting Countries].

And they went along, and they said, essentially, "We know you're in a difficult position, and we want to raise the oil price because the oil price is just too low." And they negotiated with the representatives of major oil companies, including the US, and they could not come to an agreement. And they said, "Do you know what? We cannot reach an agreement. [So] We will unilaterally raise the price of oil."

They are doing this in connection with the Arab-Israeli War of 1973, together with an oil embargo. And the effect was very immediate. The price of oil went down sharply, and actually caused a recession in the US.

But what it also did was help oil companies make a lot more money on this, including Aramco and including the Saudis. did the Saudis with all this cash? Well, they put it into their own palaces and in their own country, but they also used it to buy the company from the Americans. And then in 1988, the Saudis finally christened Saudi Aramco.

Sean Rameswaram

How has [the company] changed from what it was in the 1970s to now?

Ellen Ward

In the 1970s, Aramco was basically an oil pumping machine, pumping oil out of the ground, and most of it was sold as crude to the four Americans ke the companies that owned it. Now it's much more like an international oil company like BP or Exxon or Royal Dutch Shell or Total in that they pump oil, they have crude oil assets, but they also have a selection of what we call "downstream assets", which are refineries, petrochemicals companies. And they have these in Saudi Arabia, but also around the world.

Sean Rameswaram

What is the relationship between this company and the Saudi monarchy right now?

Ellen Ward

It's much harder now than it was. Their first Saudi CEO at that time, a man named Ali al-Naimi, he negotiated with the king to keep Aramco separate from the Saudi government. Yes, they have a board appointed by the government that approves their plans. But essentially, they get to decide how much money they want to spend on capital expenditure, what kind of projects they want to do and what their strategy is. And it is unique among national oil companies.

So Aramco is not quite a national oil company, but it is not a private oil company either. It's somewhere in between, and it has a high degree of independence. That is about to change. And we have seen that the change happened since the ascension of King Salman [bin Abdulaziz Al Saud] to the throne and also of his son, the young Crown Prince Mohammed bin Salman, and they take a much more active role in the larger strategy of company.

They don't try to run it day by day, but they say things like, "We want you to buy this petrochemical company" or "we want to be made public, and that's how it's going to be." And it has been a very different thing for Aramco to have to cope with so much independence. And that has created some excitement.

Sean Rameswaram

It sounds like you say it is difficult to separate the Saudi monarchy from Aramco.

Ellen Ward

It is difficult to distinguish them from Aramco when it comes to big decisions. Aramco is nowhere near as interwoven with the government as any other national oil company. But this is the real problem with this IPO. Normally, when a company makes an IPO, the money goes to the company to expand, to do new things, but that's not the case here.

The monarchy wants to make money from Aramco shares and take the money they make from stock sales and put them into things that don't involve the company. So they want to put it into their sovereign wealth fund, which is designed to make investments both in companies in Saudi Arabia to help promote economic development and diversification, but also companies around the world international companies. And use it to make investments in tech companies and all kinds of crazy companies they've invested in, such as Magic Leap virtual reality or a tech company or Uber or Tesla.

Sean Rameswaram

This is going to be one of the richest countries in the world, right? How do they need cash for some "sovereign wealth fund" that will fund the startup?

Ellen Ward

Saudi Arabia really has a one-trick economy, selling oil. And they have done pretty well with that. But it does not always go very well for the general economy, and does not necessarily employ everyone. It does not promote small business development. It does not promote a vibrant economy.

What if oil prices stay low and stay low for a long time? What if the oil runs out? At some point, the oil will run out. So the Saudi government has put together this plan that is designed to diversify the economy so that they are no longer completely dependent on a single commodity.

Sean Rameswaram

Do we have any idea how this listing will go in December?

Ellen Ward

Some of the interesting thing is that this company makes $ 111 billion in profits. That's what it did with profits in 2018. Apple I think is the second most profitable company, [and] made only $ 60 billion in 2018.

And people don't plan to just throw it aside, especially in a market Today when so many of the IPOs that come up are companies that do not even earn and have never earned and can never earn. So when an IPO comes for a company that is hugely profitable, it's very difficult to turn away.

If the IPO does not go so well – and there is a clear chance that it may not go well – it can affect the earnings of other oil companies. Although I would say that if it does not go well, it reflects more of the Saudi government than it is of Aramco itself.

If the IPO does not go very well and politically the Saudi monarchy looks bad, it can be very far-reaching, especially for the United States, which maintains strong diplomatic ties to Saudi Arabia. So that's something people definitely need to be on the lookout for; This can in some ways potentially fundamentally change the balance of power in the Middle East.


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