Primarily 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 rating 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 in 2018 when Saudi Crown Prince Mohammed bin Salman announced plans to list 5% of Aramco at a valuation of approximately $2 trillion in what became the largest initial public offering (IPO) ever.
How Much Money Does Saudi Aramco Make?
In 2019, Aramco had a net income of $88 billion, down from $111 billion in 2018. Aramco attributes this to lower crude oil prices and production volume, as well as declining margins and certain impairments. Free cash flow was $78 billion, compared to $86 billion the prior year. The decrease was due to the lower income.
The full-year profits for 2019 at $88 billion are several times larger than the annual $16.5 billion profits of oil and gas rival Royal Dutch Shell (RDS.A), the largest publicly-traded oil company after Aramco. For comparison, iPhone maker Apple, the world’s most profitable public company after Aramco, generated $55 billion in profits in 2019, a little more than half of Saudi Aramco's bottom line in 2019.
Until 2019, 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.
Credit rating firm Moody's attributes the ultra-high profit numbers to the company’s economies of scale. The company produced an average of 13.2 million barrels per day in 2019, more than five times Exxon Mobil Corp.’s (XOM) daily production average.
Saudi Aramco IPO
In 2019, Aramco went public with an IPO, raising a record $25 billion by selling three billion shares. This amount was only 1.5% of the company's value, significantly lower than what most companies distribute. For example, Apple, Alphabet, and Amazon (AMZN) all have more than 84% of their shares held by the public. This allows Saudi Arabia to remain in control of the company as proceeds from the offering are central to a plan by the Saudis to diversify the oil giant. More shares are available for sale due to the "greenshoe" option. The IPO price valued the company at $1.7 trillion, below the Crown Prince's valuation of $2 trillion.
Plans for the company's public debut reportedly stalled in the past as some market watchers argued that the company’s real value was far lower than estimates by the crown prince. In addition, it was 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.
Saudi Aramco's History
Saudi Aramco was formed as the product of a Concession Agreement between the Saudi Arabian government and the 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 become 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 research and development (R&D) to expand into nonmetallic and crude-to-chemicals products.
Saudi Aramco is currently led by Amin H. Nasser, its president and CEO. Yasir Al-Rumayyan is the Chairman of the company.
Saudi Arabia's Involvement in Saudi Aramco.
Saudi Arabia's involvement in Aramco is immense. It is primarily a state-owned entity of which the government of Saudi Arabia derives a significant portion of its wealth. The oil company pays a hefty tax rate of 50% to the Saudi Arabian government. Prior to 2017, the tax rate was 85%.
The ties of Aramco to the Saudi government has resulted in a lower rating than would be expected of a firm of its stature. 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.
"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.
Moody's affirmed the rating in May 2020.