Saudi Aramco Makes IPO Official

Investors within Saudi Arabia will soon be able to get a slice of the world’s largest pie. On Sunday, November 3, Saudi Arabia’s state oil company, Aramco, confirmed its plans to hold an initial public offering on the Ridyah stock exchange. 

The launch price will be determined after the company evaluates the level of interest from investors, Aramco says. The government has not disclosed how many shares will be sold or what percentage of the company they will account for. Several weeks ago, Crown Prince Mohammed bin Salman speculated that the state might sell five percent of the company for $100 billion, which would lead to a valuation of $2 trillion - about the same as Apple and Microsoft combined.

Prince Mohammed has been promising an IPO since 2016. Last month’s drone attack on Aramco facilities postponed the IPO, but Sunday’s approval by Saudi Arabia’s Capital Market Authority has formally kicked things off.

Saudi Aramco says it currently has no plans for a foreign share listing. Initially, Prince Mohammed suggested there could be a two-stage IPO, with foreign investors allowed during the second stage. Those plans seem to have been put aside for now.  

"For the (international) listing part, we will let you know in due course. So far it's only on Tadawul," said Aramco chair Yasir al-Rumayyan during a media conference.

"Investing in Aramco carries risks, of course,” said IG Group chief analyst Chris Beauchamp, “and not only that oil prices will struggle to move higher. Political and strategic risks are high for any firm operating in the region, not least one which is an arm of the Saudi state. Aramco also has limited control in output policy, a key part of Saudi Arabia's OPEC management."

What are the political risks?

When drone attacks hit the Khurais oil field and Abqaiq oil facility in Saudi Arabia, it became obvious that investing in Aramco could be risky. Aramco CEO Amin Nasser addressed the issue directly at a media conference, asserting that Aramco is still the most reliable oil company in the world. 

Further assurances came in an official statement accompanying news of the upcoming IPO: "The company does not expect the impact of these attacks to have a material impact on its business, financial condition, or results of operations."

More on Saudi Aramco

Saudi Aramco started in 1933 when the Standard Oil Company of California entered into an oil exploration contract with the Saudi government. Standard discovered the world’s largest oil field, Ghawar Field, in 1938. The Saudis began buying shares of Standard’s local subsidiary, the Arabian American Oil Company - or Aramco for short - in 1973. By 1980 the company was wholly owned by the Saudi Arabian government.

According to the Energy Information Administration, Saudi Arabia has the second-biggest oil reserves in the world, right after Venezuela. When it comes to oil production, it also takes second place — right after the US. Oil is not only plentiful, but inexpensive to extract in Saudi Arabia.

Why is Saudi Arabia selling shares in Aramco? 

Saudi Arabia wants to stop relying on oil as a foundation for its economy. In a world where oil supplies are becoming uncertain, Crown Prince Mohammed wants to turn to other sources of energy. Saudi Arabia’s vast deserts are a perfect location solar power fields, enough to fuel the whole country.

The country plans to shift to renewable sources of energy in the next decade, as outlined in its Saudi Vision 2030 plan. 

The biggest obstacle to this plan is the rising international sentiment against fossil fuels. Oil prices are dropping, and investors are looking for more ethical fuel sources. Fossil fuels might be on their way out, so the company’s value could keep dropping. 

The opening price for Aramco stocks will be set on December 4. Trading will begin on the Tadawul stock exchange on December 11.