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The Saudi Aramco Handbook – Everything You Need to Know About the World’s Largest IPO

by | published March 27th, 2018

We’ve been talking about Saudi Arabia’s plan to roll out the single-largest IPO in history for some time here in Oil & Energy Investor.

Right off the bat, I can tell you that the Saudi IPO is going to create an onslaught of profit plays for years to come after the actual listing.

Think about it.

$2 trillion could soon be hitting the global energy markets. This could be the biggest wave of capital to hit at one time in history.

Earth-shaking events like these are the reason why more millionaires and billionaires are created overnight in the energy markets than in any other sector.

That’s also why I want to take a few minutes today to tell you everything you need to know about Saudi Aramco, including how much it’s really worth, where it will be listed, and how you can profit from it.

And we’ll start with how Saudi Aramco came to be the biggest oil company in the world…

What is Saudi Aramco?

Simply put, Aramco is the national oil company of Saudi Arabia, but it didn’t start out that way.

Aramco actually began as part of the Standard Oil Company of California (Socal), the company owned by the original oil baron, John D. Rockefeller, when it signed an oil contract deal with Saudi Arabia in 1933.

The deal created the California-Arabian Standard Oil Company, which would eventually turn into the Arabian-American Oil Company – Aramco – in 1944.

Then, in 1950, Saudi Arabia demanded a renegotiation of the contract, with the Saudi government wanting 50% of the income from Aramco’s oil.

But the Saudi government wouldn’t stop there…

Starting in 1973, this de facto OPEC leader began taking ownership of Aramco, starting with a 25% stake.

By 1980, they owned 100% of the oil company.

And Aramco’s relationship with the Saudi government is precisely why it’s so valuable now…

Because the Saudi government owns Aramco, the company has exclusive access to all of Saudi Arabia’s oil reserves. The country’s proven oil reserves are the second largest in the world, with an estimated 265 billion barrels of oil – enough to power every American car, truck, ship, and airliner for the next 36 years – in its control.

Its oil reserves alone make this company worth more than Exxon Mobil Corp. (XOM), Royal Dutch Shell Plc. (RDS.A), Chevron Corp. (CVX), and BP Plc. (BP) – combined.

How Much Is Saudi Aramco Worth?

Determining the value of Saudi Aramco’s IPO depends on what you look at.

Crunching the numbers based on the straight valuation of a 5% stake in Aramco (and more on the basis of how that is determined in a moment) would bring it in at around $600 billion.

There will be some leveraging since it will also be folded into the already existing Saudi Arabian Public Investment Fund (PIF).

That should bring the total close to $1.4 to $2 trillion.

The missing piece, however, is reserves.

What Are the Real Reserves?

Large oil companies are valued based on how much their oil reserves are worth.

With Aramco, there is just one problem.

No one has seen data on its reserves since the Americans left almost four decades ago.

Now, the Saudi government keeps both the official number of its oil wells and the size of its oil reserves secret for strategic reasons.

But not disclosing this information could prove to be the single-biggest problem this IPO faces.

Fact is, this IPO is destined to fail unless there is a realistic, detailed, and public valuation of the Aramco oil reserve market value.

Is the IPO Dependent on Oil Prices?

Absolutely.

Even the Saudis recognize the value of the IPO is dependent upon the value of oil.

As I just mentioned, the company’s value, in turn, rests on the value of the reserves.

That means they need to keep the global price of oil as high as possible.

My reading of the central budget situation dictates a Brent price of $108 a barrel to avoid additional deficits.

Brent is the globally preferred benchmark rate for futures contracts set daily in London. With that price just above $70 as I write this, the IPO does not avoid likely government recourse to deficit finance moving forward.

That means the IPO will help, but the systemic problems will still remain.

Where Will Saudi Aramco Be Listed?

From the NYSE and Nasdaq in the U.S., to the Hong Kong Ltd in China, and the London Stock Exchange (LSE) in England, there’s no shortage of prominent exchange “suitors” for Aramco to choose from.

But right now, the main competition for IPO remains between the NYSE and the LSE, although there will be a range of American Depository Receipts (ADRs), Global Depository Receipts (GDRs), and clone certificates circulating on other exchanges (Singapore, Frankfurt, Shanghai, Dubai leading here).

There also will be active private distribution of paper representing holdings obtained from the IPO.

The overriding consideration is liquidity.

MbS will certainly have as a primary concern how much revenue can be gained from the float.

Contacts are also pointing out that some in Riyadh have a corollary concern over how much information an exchange requires in the IPO package.

That is currently a factor mitigating against using the NYSE as a sole release point.

However, there is also an added wrinkle.

MbS wants a portion of this to float on the Tadawul, the local stock exchange in Riyadh.

Given the trading and valuation size of the Tadawul, it is far too small to serve as the primary focus of the float but will be instrumental in determining the value of, and control over, equities acquired (and discussed below).

For this, access/control over external banking is essential.

There had been a public disagreement among Saudis leaders over whether the privatization of Aramco would be an IPO or secured through private placements. Chinese interests were highlighted in this latter camp.

That matter is now resolved, assisted by some royal figures coerced into an unexpected stay at the Riyadh Ritz Carlton.

However, a successful initial IPO may well spawn additional Secondary Placement Offers (SPOs), and those may well have private placements.

When Is Saudi Aramco Going Public?

Sources in the Saudi Ministry of Energy, Industry and Mineral Resources still maintain that Aramco is planning for a 2018 IPO.

But there is disagreement in Riyadh over the timing.

Others are suggesting that the first quarter of 2019 may be more likely.

The timing is a function of the following several factors.

My take here is it will still be rolled out at the turn of the year.

How Does Saudi Arabia Plan to Use the Revenue Obtained?

Here is the single most decisive change that MbS is orchestrating.

Those who suggest that the IPO results from a decision to move away from oil miss the point.

For the foreseeable future, the Saudi financial structure will still be dependent upon the price for oil – either the volume sold into the international market or the portion of reserves upon which an IPO and later issuances are based.

The massive change is found in how the IPO-fueled PIF will diversify the Saudi economy.

Some of this will comprise domestic investments, such as the major moves to solar power and the recently announced plan to create an entirely new renewably-powered city.

Nonetheless, the main transformation will be found in the diversification of revenue flow.

The PIF will become the vehicle for a massive acquisition of equity, debt, and company control internationally.

Saudi Arabia will diversify its own economy by acquiring assets abroad.

Initially, some acquisitions will remain oil-based (refineries in other countries, for example).

This simply reinforces the reality that in the near and medium-term the IPO and PIF will have their values based upon the price of oil.

However, the primary trends will move to non-energy with the corresponding diversification taking place in the sources of revenue.

Rather than introducing a main shift in what is done at home, that shift will take place via what acquisitions abroad do for a living.

Now, as I’ve said before, I truly believe this will be one of the most spectacular wealth-building opportunities of our lifetimes.

And I don’t want anybody to miss out.

That’s why I recently sat down for an interview with my friend and colleague, Bill Patalon, to talk about what exactly this upcoming $2 trillion IPO means for you.

All you have to do is click here to see the full interview for yourself to learn more.

Sincerely,


Kent

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  1. March 30th, 2018 at 09:47 | #1

    so how can I buy Saudi Aramco before it goes public?

  2. Keithd
    April 3rd, 2018 at 20:23 | #2

    One can only hope that-this ‘Windfall” will be used for diversitification of there Economy/Technology making future lives better rather than spending it frivolously, squandering chances others have done in the past, as the population continues to grow!!

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