What Is Saudi Aramco?
State-owned Saudi Aramco, officially known as Saudi Arabian Oil Company, is the world's biggest oil producer. It is officially based in Dhahran, Saudi Arabia and has an estimated 270 billion barrels in reserves.
It is by far the world's most profitable company, eclipsing even tech giants such as Apple Inc. (AAPL) and Alphabet Inc. (GOOGL). This was revealed in April 2019 when ratings agencies released financial information of the long-secretive company before its debut international bond sale, which raised $12 billion.
Saudi Aramco began to attract dramatically increased investor attention last year when Saudi Crown Prince Mohammed bin Salman announced plans to list 5% of Aramco at a valuation of approximately $2 trillion in what may be the largest IPO ever.
How Much Money Does SA Make?
For the first half of 2019, the oil giant reported a profit of $46.9 billion, which is a fall of 12% from the same period last year. Executives blame low oil prices and reduced output, according to The Wall Street Journal. Earnings before interest and tax was $92.5 billion, down from $101.3 billion a year earlier. Free cash flow was $38.0 billion, compared with $35.6 billion for the same period last year.
Until this year, Saudi Aramco’s financials had not been available to the public since the company was nationalized in the late '70s. The oil company made its financial information available in a prospectus tied to a $10 billion bond sale planned for 2019. Full-year profits for 2018 came in at $111 billion, several times bigger than the annual profit of oil and gas rival Royal Dutch Shell (RDS.A), the largest publicly-traded oil company. For comparison, iPhone maker Apple, the world’s most profitable public company, generated $59.4 billion in profit in 2018, a little more than half of Saudi Aramco's bottom line.
Credit rating firm Moody's attributes the ultra-high profit numbers to the company’s economies of scale. The company produced an average of 13.6 million barrels per day in 2018, more than three times Exxon Mobil Corp.’s (XOM) daily production average.
Per Moody’s, Saudi Aramco generated sales of about $360 billion in 2018, and had $48.8 billion of cash on the books at year-end. This compares to debt of $27 billion, per CNN.
Saudi Aramco IPO Plans
Saudi Aramco's latest financial disclosures stem from the company's renewed plans to go public. As mentioned, Crown Prince Mohammed bin Salman announced plans to list 5% of Aramco in what could be the largest IPO in history. Proceeds from the offering, totaling $100 billion, are central to a plan by the Saudis to diversify the oil giant.
The kingdom has halted the plan several times due to various factors, but sources speaking with The Wall Street Journal say it has been revived and government officials "hope to capitalize on the positive market reaction" to the firm's bond sale. "We are committed to the Aramco IPO, given the proper circumstances and the right time," the crown prince told Saudi newspaper Asharq Al Awsat in June. "It will happen between 2020 and early 2021, and setting the location of the IPO now is premature."
Plans for the company's public debut reportedly stalled in the past as some market watchers argued that the company’s real value is far lower than estimates by the crown prince. At the estimated $2 trillion valuation, Aramco would trade at more than triple the combined value of Exxon Mobil and Chevron. The company is also waiting to complete the acquisition of a 70% majority stake in state-owned chemical producer Saudi Basic Industries Corp., according to the crown prince.
It's unclear how investors' reception to a Saudi Aramco IPO would be affected by negative publicity related to allegations that Crown Prince Mohammed bin Salman was a key force behind the alleged murder of Washington Post journalist Jamal Khashoggi. However, Saudi officials are optimistic and believe international outrage is easing, according to the Journal's report.
Saudi Aramco's History
Saudi Aramco was formed as the product of a Concession Agreement between the Saudi Arabian government and Standard Oil Company of California (SOCAL) in 1933. Aramco began its first drilling operations shortly after, starting its first commercial oil production in 1938. Over the next decade, the company rapidly expanded across Saudi Arabia, reaching crude oil production of 500,000 barrels per day in 1949. In order to keep up with production, the firm built out its distribution pipeline and built the Trans-Arabian Pipeline, the longest in the world.
In 1973, the Saudi Arabian government purchased a 25% interest in Aramco, gradually increasing its stake to 100% in the late 1970s. In the late 1980s, the Saudi Arabian Oil Company (Saudi Aramco) was officially established. In 1989, in an effort to transform itself from an oil-producing and exporting company to an integrated petroleum enterprise, Aramco formed a joint venture with Texaco in the U.S. By 2017, the Saudi oil behemoth had became the sole owner of North America’s largest single-site crude oil refinery at Port Arthur, Texas. Throughout the 1990s, it continued to build alliances and partnership deals around the world. In recent years, the company has stepped up efforts to diversify its business, investing heavily in R&D to expand into nonmetallic and crude-to-chemicals products.
Who Runs SA?
Saudi Aramco is led by Amin H. Nasser, its president and CEO. Khalid Al-Falih, chairman of Aramco, was appointed Saudi Arabia’s energy minister in 2016. In June, Aramco named six new heads of departments after a government reshuffle moved a handful of executives to other state posts, per Reuters.
Saudi Arabia's Involvement In Saudi Aramco
The oil company pays a hefty tax rate of about 50% to the Saudi Arabian government, comprising a large share of total revenues from 2015 to 2017, according to Fitch Ratings. Funding has allowed the company to begin investing in ambitious long-range projects, like smart cities. Moody's attributed its A1 rating for Aramco, below peers like Chevron and Exxon, to the company's credit links to the government of Saudi Arabia, per CNBC.
"While there is a clear track record of Aramco having been run as a commercially independent company, the government’s budget is highly reliant upon contributions from Aramco in the form of royalties, taxes and dividends," wrote Moody's senior credit officer Rehan Akbar.