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Saudi Aramco Files for an IPO: Here's What You Need to Know

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Oil and gas behemoth Saudi Aramco have officially filed its paperwork to go public and intends to raise up to $25.6 billion through an initial public offering on the Riyadh stock market. 

The share sale – touted to be the world’s largest – started on Nov 17. Retail investors can apply till Nov 28 while for institutional investors, the IPO subscription will be open until Dec 4. Around one-third of the offering is reserved for local retail investors. The final price will be published by Saudi Aramco on Dec 5.

So, here’s a rundown of Saudi Aramco.

What Does Saudi Aramco Do?

Saudi Arabian Oil Company (Saudi Aramco) is the world's largest integrated energy firm. On an average, the state-owned oil and gas producer churned out a whopping 10 million barrels of oil each day during the six months from January 2019 to June 2019. Saudi Aramco is also a refining juggernaut, with a gross refining capacity of 4.9 million barrels per day.

How Much Money Does Saudi Aramco Make?

The company recently published its first-ever half-year financial results. For the six months that ended Jun 30, Saudi Aramco reported a slight decline in profits due to lower oil prices but net income – at $46.9 billion – still eased past the $20 billion+ for the likes of Microsoft MSFT and Apple Inc. AAPL during the same period. The so-called ‘Big Oil’ companies like ExxonMobil XOM, Chevron CVX and Royal Dutch Shell RDS.A are further down the pecking order. Importantly, the state-run titan raked in an astounding $38 billion in free cash flow.

How Big Is the IPO?

The company plans to sell 1.5% of its shares on the local bourse, aiming to raise between $24 billion and $25.6 billion with its IPO. At the top of that range, Saudi Aramco will beat the $25 billion Alibaba (BABA - Free Report) IPO in 2014 as the world’s largest. It expects to be valued at a staggering $1.6 trillion to $1.7 trillion but that’s below the $2 trillion level that Crown Prince Mohammed bin Salman was initially looking for. However, it will still be significantly higher than Microsoft, Amazon AMZN or Apple – the only other firms ever to have topped $1 trillion.     

What Are the Key Risks?

For a primarily oil and gas business facing a weak commodity market, as well as the controversial aspects of climate change, there are a number of risk factors.

As is the case with other companies involved in exploration and production, Saudi Aramco’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from estimates, thereby affecting the company’s revenues, earnings and cash flow.

During the first half of 2019, the Damman-based entity paid over $46 billion in dividends to its shareholder – the Kingdom of Saudi Arabia – including a special dividend of $20 billion. There are certain apprehensions regarding Aramco's monster dividend payouts to the Saudi government, especially with little prospect of oil prices moving much beyond $60 per barrel.

The recent attack on Saudi Arabia’s oil installations have raised the risk quotient associated with onshore oil production. In September, unmanned aerial vehicles struck Saudi Aramco’s Abqaiq plant – a key crude processing facility – and the Khurais complex, which houses the kingdom’s second-largest oilfield.

Finally, there is the climate change debate. Saudi Aramco is faced with the challenge of producing the most oil in the world and yet not to be seen as one of the world's biggest evils. The firm, which claims to be ‘the cleanest major oil company’ on the back of zero gas flaring and sophisticated field technology, will have to deal with pressure from environmentalists to cut emissions and curb climate change.

What’s the Outlook for Saudi Aramco’s Business?

It’s quite clear that Aramco's half-yearly numbers are a testament to the company's unmatched scale and earnings prowess. Agreed, there are worries related to Aramco's dividend payouts to the Saudi government, the latest financial results certainly tell us how sustainable the company’s business actually is – even in the face of the ongoing commodity price uncertainty.

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