Saudi Aramco: IPO Ahead

Two trillion dollars is larger than the annual GDP of Canada – and the market valuation Saudi Aramco is hoping to achieve when it lists a portion of its state-owned company on the Saudi stock exchange (Tadawul).

Saudi Aramco is the world’s largest integrated oil and gas company and that market valuation would also be larger than the market capitalization of the 15 biggest oil and gas companies globally.

While complete details have yet to be announced, it will go down as the largest flotation in history. The success of the IPO will be a critical component in achieving “Saudi Vision 2030,” a plan steered by the crown prince of Saudi Arabia, Mohammad bin Salman, to diversify the country’s economy and reduce its dependency on oil revenues.

Saudi Aramco boasts itself as a juggernaut: it produces one in every eight barrels of crude oil globally in addition to having proven liquid reserves five times larger than Exxon Mobil, Chevron, BP, Total, and Royal Dutch Shell combined. In 2018, it produced 13.6 million barrels per day of oil equivalent, including 10.3 million barrels per day of crude oil. It is also the fourth largest integrated refiner in the world, having a gross refining capacity of 4.9 million barrels per day in 2018.

Saudi Aramco reported 2018 revenues of $355 billion and net income of $111 billion, making it the world’s most profitable company as seen in Exhibit 1. It also demonstrated best-in-class margins, reporting an earnings before interest and tax (EBIT) margin of 59.8% and a net profit margin of 31.2%. This compares to an average EBIT and net profit margin of 12.4% and 8.3% for the S&P 500 Integrated Oil & Gas sub-industry according to I/B/E/S data from Refinitiv. It can produce best-in-class margins given its position as the lowest-cost producer globally, as of 2018. According to Saudi Aramco’s prospectus, the cost of producing a barrel of oil is approximately $7.50 (including capital expenditures per barrel), providing a foundation for strong cash flow generation.

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