What is Saudi Aramco? | CNBC Explains

Summary

Saudi Aramco, the world's largest oil company, is considering an IPO that could be the largest in history. Originating from a 1933 agreement, it became fully state-owned by 1980. With vast oil reserves, Aramco is a dominant player in the energy market. Despite not publishing financial reports, a leaked report suggests a net income of $33.8 billion for H1 2017. The IPO aims to diversify Saudi Arabia's economy, with Crown Prince Mohammed bin Salman's Vision 2030 at its core.

Takeaways

• 🏆 Saudi Aramco is the largest oil company globally and a major crude oil exporter.
• 🌍 Major stock exchanges like London, Hong Kong, and New York are vying for its public listing, which could be the largest IPO ever.
• 📜 Founded in 1933 through an agreement between Saudi Arabia and a California-based oil company, it was initially named California Arabian Standard Oil Company.
• 🔄 Renamed Arabian American Oil Company in 1944, it's now commonly known as Aramco.
• 🇸🇦 By 1980, Saudi Arabia had fully nationalized Aramco, creating the Saudi Arabian Oil Company in 1988.
• 💰 Aramco's core business is oil extraction and sales, with vast reserves making it a significant player in the global energy market.
• ⛽️ Beyond extraction, Aramco refines oil into products like gasoline and chemicals, and trades about 1.5 million barrels of these products daily.
• 💼 The company's financials are not publicly disclosed, but it's valued at around $2 trillion by Saudi officials, though some analysts dispute this figure.
• 📈 A leaked earnings report suggests a net income of $33.8 billion for the first half of 2017, outperforming Exxon Mobil.
• 🌐 Aramco plans to offer about 5% of its shares to investors, with proceeds directed towards diversifying the Saudi economy.
• 👑 The final decision on the IPO's timing and location rests with Crown Prince Mohammed bin Salman as part of Saudi Arabia's Vision 2030 to reduce oil dependency.

Q & A

What is Saudi Aramco?

Saudi Aramco is the state-owned oil company of the Kingdom of Saudi Arabia and is the biggest oil company in the world, helping the country become the largest exporter of crude oil.

Why are stock exchanges in London, Hong Kong, and New York interested in Saudi Aramco?

These stock exchanges are interested in Saudi Aramco because the Saudi Arabian government is looking to take a part of the company public, which could result in the largest IPO in history.

When was Saudi Aramco established and what was its original name?

Saudi Aramco was established in 1933 out of an agreement between Saudi Arabia and California-based oil company Socal. It was originally called the California Arabian Standard Oil Company.

What was the significance of the 1944 name change to Arabian American Oil Company?

The name change to Arabian American Oil Company in 1944 signified a rebranding and the adoption of the acronym 'Aramco' that the company is now widely known by.

How did the ownership of Aramco change over time?

For years, Aramco was run by a consortium of U.S. oil companies. However, following the creation of OPEC and the nationalization of natural resources, by 1980 the Saudi government had completed its buyout of Aramco’s assets.

What is Saudi Aramco's primary business?

Saudi Aramco's main business is pumping oil and then selling it around the world to customers in places like Japan, the U.S., and China.

What does Saudi Aramco do beyond drilling for oil?

Beyond drilling, Saudi Aramco refines crude into oil products like gasoline and chemicals. It also has a trading arm that buys and sells about 1.5 million barrels of chemicals and polymer products every day.

Why is it difficult to determine Saudi Aramco's revenues?

It is difficult to determine Saudi Aramco's revenues because, as a sovereign-owned company, it has never published a financial report.

What is the estimated valuation of Saudi Aramco and how does it compare to other companies?

Saudi officials estimate Aramco's valuation at a record $2 trillion, which would dwarf market caps of companies like Microsoft, Alphabet, and Apple, the world's most valuable publicly traded company.

What does the leaked earnings report for the first half of 2017 reveal about Saudi Aramco's financial performance?

The leaked earnings report revealed a net income of $33.8 billion for the first half of 2017, showing that Aramco earned more than four times Exxon Mobil, the world's biggest energy company by market cap.

What is the purpose of the IPO for Saudi Aramco and how much of the company is expected to be offered to investors?

The IPO is part of Saudi Arabia's Vision 2030 to diversify the economy away from oil dependence. Aramco is expected to offer about 5% of the company to investors.

What is the role of Crown Prince Mohammed bin Salman in the IPO of Saudi Aramco?

Crown Prince Mohammed bin Salman will have the final say on when and where Aramco's historic IPO will happen, as it is a significant part of his Vision 2030 plan.

What is the potential impact of the IPO on the stability and future of Saudi Arabia?

The success of the IPO could be critical for the future stability of the kingdom, ensuring the ruling royal family's ability to maintain their social contract with the people, which includes generous state handouts in return for political loyalty.

Outlines

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🏢 Saudi Aramco: The World's Largest Oil Company

Saudi Aramco is the largest oil company globally and a key player in Saudi Arabia's status as the world's leading crude oil exporter. The company is considering going public, which could result in the largest IPO in history. Founded in 1933 as a result of an agreement between Saudi Arabia and the California-based oil company Socal, it was originally named the California Arabian Standard Oil Company and later renamed the Arabian American Oil Company, or Aramco. Over time, Aramco transitioned from being managed by a consortium of U.S. oil companies to being fully owned by the Saudi government by 1980. Its primary business involves oil extraction and sales, with vast reserves making it a significant player in the global energy market. Aramco also refines crude oil into products like gasoline and chemicals and has a trading arm that deals in chemicals and polymer products. Despite its size, Aramco has never published financial reports, but leaked earnings suggest a net income far exceeding that of Exxon Mobil. The company is expected to offer about 5% of its shares to investors, with the proceeds intended to diversify the Saudi economy. The IPO's success is crucial for the kingdom's economic stability and the ruling royal family's social contract with its people.

Keywords

💡Saudi Aramco

Saudi Aramco is a state-owned oil company of Saudi Arabia and the largest oil company globally. It plays a pivotal role in the country's status as the world's largest exporter of crude oil. The company's potential IPO is expected to be the largest in history, reflecting its immense financial strength and market influence. The script mentions Aramco's history, its evolution from a consortium of U.S. oil companies to full government ownership, and its current status as a key player in the global energy market.

💡IPO (Initial Public Offering)

An IPO refers to the first sale of stock by a private company to the public. In the context of the video, Saudi Arabia is considering taking a part of Saudi Aramco public through an IPO, which could be the largest in history due to the company's massive size and valuation. The IPO is a significant event that would allow the company to raise capital by offering its shares for sale to institutional and retail investors, as indicated by the script's mention of the IPO's potential scale and global interest.

💡Crude Oil

Crude oil is a raw, unrefined petroleum product that is the main source of fuel for internal combustion engines. It is the primary product that Saudi Aramco extracts and sells worldwide. The script highlights that Saudi Aramco's main business is pumping oil and then selling it to customers in various countries, emphasizing the company's role in the global oil supply chain.

💡OPEC (Organization of the Petroleum Exporting Countries)

OPEC is an intergovernmental organization of oil-exporting countries that coordinate and unify petroleum policies to ensure stable oil prices. The script discusses how, following OPEC's creation, Saudi Arabia and other oil-producing countries began nationalizing their natural resources, leading to the Saudi government's eventual buyout of Aramco's assets.

💡Nationalization

Nationalization is the process by which a government takes control of an industry or asset that has been operated by private interests. In the video script, it is mentioned that Saudi Arabia nationalized its natural resources, including Aramco, by completing its buyout of the company's assets by 1980, which led to the creation of the fully state-owned Saudi Arabian Oil Company in 1988.

💡Valuation

Valuation refers to the estimated value of a company or an asset. The script discusses the controversy surrounding Saudi Aramco's valuation, with Saudi officials claiming a record $2 trillion valuation, while some analysts believe it is half of that. Valuation is crucial for determining the worth of a company, especially in the context of an IPO, as it influences the price at which shares are sold.

💡Market Cap

Market capitalization, or market cap, is the total value of a company's outstanding shares of stock. The script compares Aramco's potential $2 trillion market cap with that of companies like Microsoft, Alphabet, and Apple, emphasizing Aramco's financial strength if the high valuation is achieved.

💡Refining

Refining is the process of converting crude oil into useful products such as gasoline, diesel, and chemicals. The script mentions that beyond drilling, Aramco also refines crude into oil products, which is an essential part of the oil industry's value chain and contributes to the company's revenue.

💡Trading Arm

A trading arm refers to a division of a company that is responsible for buying and selling commodities or financial instruments. The script highlights that Aramco launched a new trading arm in 2012, which trades about 1.5 million barrels of chemicals and polymer products daily, helping the company to keep more revenue in-house and reduce reliance on external traders.

💡Diversification

Diversification is the strategy of allocating investments across different financial instruments, industries, or markets to optimize returns and reduce risk. The script discusses how the proceeds from Aramco's IPO will be invested in non-oil sectors such as tourism, healthcare, and mining, indicating Saudi Arabia's efforts to diversify its oil-dependent economy.

💡Vision 2030

Vision 2030 is an ambitious reform plan initiated by Saudi Arabia's Crown Prince Mohammed bin Salman to reduce the country's dependence on oil and diversify its economy. The script connects Aramco's IPO to Vision 2030, suggesting that the IPO is a significant step in achieving the goals of economic diversification and modernization outlined in the plan.

Highlights

Saudi Aramco is the world's largest oil company and a key crude oil exporter.

London, Hong Kong, and New York's stock exchanges are vying for Saudi Aramco's IPO, potentially the largest in history.

Saudi Aramco originated from a 1933 agreement between Saudi Arabia and California-based oil company Socal.

The company was initially called California Arabian Standard Oil Company and later renamed Arabian American Oil Company.

For many years, Aramco was managed by a consortium including Chevron, Texaco, and Exxon Mobil's predecessors.

Saudi Arabia nationalized Aramco's assets by 1980, forming the Saudi Arabian Oil Company in 1988.

Aramco's core business is oil extraction and global sales, particularly to Japan, the U.S., and China.

The company has vast oil reserves, positioning it as a major player in the world energy market.

Aramco also refines crude into oil products like gasoline and chemicals.

In 2012, Aramco launched a trading arm to handle daily sales of 1.5 million barrels of chemicals and polymers.

Financial details of Aramco are not public, but Saudi officials estimate a $2 trillion valuation.

A leaked earnings report suggests a net income of $33.8 billion for the first half of 2017, surpassing Exxon Mobil.

Aramco plans to offer about 5% of its shares to investors, with proceeds directed towards non-oil sectors.

The company intends to list on the Saudi stock exchange, Tadawul, with an international listing under review.

The U.K.'s Financial Conduct Authority has created new rules to attract Aramco for a premium listing.

The timing of the IPO is uncertain, with some suggesting Saudi Arabia is in no rush due to rising oil prices.

The IPO is a central part of Crown Prince Mohammed bin Salman's Vision 2030 to diversify the Saudi economy.

The success of the IPO is crucial for the kingdom's future stability and the royal family's social contract with its people.

Transcripts

Saudi Aramco is the state-owned oil company of the Kingdom of Saudi Arabia.

It’s the biggest oil company in the world, helping the country become the biggest exporter of crude oil.

London, Hong Kong and New York’s stock exchanges are all wooing the oil powerhouse,

as Saudi Arabia’s government looks to take a part of the company public.

If that happens, it’s set to be the largest IPO in history.

Saudi Aramco was born in 1933 out of an agreement

between Saudi Arabia and California-based oil company Socal.

This agreement, like many granted to big U.S. and British oil companies at the time,

gave it the exclusive right to explore and extract oil on Saudi territory.

Originally called the California Arabian Standard Oil Company,

it was renamed the Arabian American Oil Company in 1944, or as we now know it, by its acronym Aramco.

For years, Aramco was run by a consortium of U.S. oil companies

including the predecessors of Chevron, Texaco and Exxon Mobil.

But following the creation of OPEC, Saudi Arabia and several other oil producing countries

began nationalizing their natural resources.

By 1980, the Saudi government had completed its buyout of Aramco’s assets,

eventually creating the Saudi Arabian Oil Company in 1988.

Saudi Aramco’s main business is pumping oil and then selling it around the world

to customers in places like Japan, the U.S. and China.

Aramco reports vast oil reserves, which when compared to the largest energy companies,

make them one of the biggest players in the world energy market.

Beyond drilling, the company also refines crude into oil products like gasoline and chemicals.

And in 2012, Aramco launched a new trading arm, which it says buys and sells

about 1.5 million barrels of chemicals and polymer products every day.

This helps keep more of that revenue in house, by reducing its reliance on outside traders.

Working out Aramco’s revenues, however, is a little more difficult.

The sovereign-owned company has never published a financial report.

Saudi officials say Armaco is set for a record $2 trillion valuation.

But not everyone agrees, with some analysts slicing that valuation in half.

A $2 trillion valuation means Aramco’s market cap dwarfs the likes of Microsoft, Alphabet

and the world’s most valuable publicly traded company, Apple.

This financial strength was emphasized in a leaked earnings report,

revealing a net income of $33.8 billion for the first half of 2017.

The report, which was disputed by the company, showed they earned

more than four times Exxon Mobil, the world’s biggest energy company by market cap.

The report could offer potential investors a better understanding

of the scale of Saudi Aramco ahead of its eagerly anticipated IPO.

Aramco is expected to offer about 5% of the company to investors, with the proceeds from

the sell off to be funneled into non-oil sectors such as tourism, healthcare and mining.

Aramco says it will list its public shares on the Saudi domestic stock exchange, the Tadawul.

An international option is "under active review."

But concerns about whether the Tadawul can manage such a large offering

has given global bankers and exchanges around the world the motivation

to continue to lobby Aramco to also list with them.

The U.K.’s Financial Conduct Authority even created new rules

that allow sovereign-controlled companies such as Aramco to achieve a premium listing

on the London Stock Exchange, without following the usual rules and practices.

When the IPO will take place is also unclear.

Some analysts say the reality is that Riyadh is in no rush

to privatize their crown jewel as oil prices rise once again.

There are also some within the Saudi government, that doubt the logic behind privatization.

Critics also believe that peak oil demand is a long way off

and that selling, even a small part of Aramco, is a bad move.

Helping decide when and where Aramco’s historic IPO happen

are CEO and President Amin Nasser and Saudi Energy Minister Khalid al-Falih.

But it’s the crown prince, Mohammed bin Salman who will have the final say.

The IPO is a big part of bin Salman’s Vision 2030

and its effort to diversify Saudi Arabia’s oil dependent economy.

Yet while the young heir is trying to move his country's economy away from hydrocarbons,

Aramco’s $2 trillion valuation will only be achieved if the company can show that their fossil fuel reserves

that they're trying to diversify away from, are still worth investing in.

The trillions of dollars Riyadh is hoping to raise from the IPO

would in theory increase support for privatizing more of its economy.

But it could also be critical for the future stability of the kingdom.

Its success will ensure the ruling royal family’s ability to maintain their social contract with its people,

generous state handouts in return for political loyalty.

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