SAUDI ARAMCO, the LARGEST company in the WORLD - VisualPolitik EN

Summary

Saudi Aramco, the world's largest oil company, went public in 2019, raising $25.6 billion in the largest IPO ever. The company, valued at nearly two trillion dollars, produces over 10% of the world's oil and is central to Saudi Arabia's economy. Despite its massive size and profitability, Aramco's IPO faced challenges due to transparency issues and market skepticism about its valuation. The Saudi government's Vision 2030 plan, led by Crown Prince Mohammed Bin Salman, aims to diversify the economy and reduce dependence on oil, which currently funds 70% of government revenue and 80% of exports. The IPO was intended to finance this diversification, but the sale was limited to the Saudi stock exchange, raising less than expected and highlighting the nation's ongoing reliance on oil.

Takeaways

• 🌐 Saudi Aramco is a company with an annual turnover surpassing many countries' economies, producing over 10% of the world's oil.
• 🏆 It controls more oil reserves than any country except Venezuela, making it a dominant force in global energy.
• 💵 The company is valued at nearly two trillion dollars and can generate profits over 100 billion dollars per year.
• 📈 Aramco's IPO was the largest public offering in history, raising $25.6 billion by selling only 1.5% of its shares.
• 🌍 The IPO aimed to diversify Saudi Arabia's economy, which is heavily dependent on oil for income and exports.
• 👑 Crown Prince Mohammed Bin Salman's Vision 2030 program seeks to reduce the country's reliance on oil and create new jobs.
• 📉 Despite the IPO's success in raising capital, Aramco's listing faced challenges due to transparency issues and geopolitical risks.
• 💼 The Saudi government's push for the IPO included pressuring allies and businessmen to buy shares and offering low-interest loans for retail investors.
• 🏦 The company's market debut did not attract significant foreign investment, reflecting concerns about governance and economic stability.
• 🔍 The IPO's outcome raises questions about the effectiveness of Mohammed Bin Salman's economic diversification strategy.

Q & A

What is Saudi Aramco and why is it significant?

Saudi Aramco is the largest oil company in the world, responsible for over 10% of global oil production. Its importance lies in its vast oil reserves, second only to Venezuela, and its ability to influence the global economy. It has a market value close to $2 trillion and generates profits exceeding $100 billion annually.

Why did Saudi Arabia decide to list Aramco on the stock market?

Saudi Arabia listed Aramco to raise funds for its Vision 2030 program, which aims to reduce the country’s dependence on oil. By selling shares in Aramco, the government hoped to finance new projects, create jobs, and diversify the economy.

How much of Aramco was sold in its Initial Public Offering (IPO), and what was the outcome?

In the IPO on December 11, 2019, Saudi Arabia sold only 1.5% of Aramco, raising $25.6 billion. Although it became the largest IPO in history, the sale fell short of initial expectations, as Crown Prince Mohammed bin Salman originally planned to sell 5% and raise $100 billion.

What challenges did Aramco face in its efforts to list on major international stock exchanges?

Aramco faced two major challenges: (1) the strict transparency and regulatory standards required by international markets, which conflicted with the company’s secretive operations, and (2) lower-than-expected market valuations due to concerns over Saudi Arabia’s authoritarian regime, regional instability, and dependence on oil.

What actions did the Saudi government take to ensure the success of Aramco’s IPO?

The Saudi government took several measures to ensure the IPO's success, including pressuring local businessmen and allied countries like Kuwait and the UAE to buy shares. They also offered low-interest loans to smaller investors and launched an extensive advertising campaign.

What role does Aramco play in Saudi Arabia's economy?

Aramco plays a central role in Saudi Arabia's economy, contributing about 70% of government income and 80% of exports. The company is also a major taxpayer, paying 20% on income and 50% on profits, making it a key source of government revenue.

Why is Saudi Arabia so dependent on oil, and what are the risks of this dependence?

Saudi Arabia's economy is heavily reliant on oil, with most government income and exports tied to hydrocarbons. The risks include price volatility, the rise of alternative energy sources, and increasing environmental concerns, which could reduce global demand for oil. This dependence is problematic, especially given the country's young and growing population, which expects continued economic benefits.

How does Saudi Arabia’s population impact its need for economic diversification?

Saudi Arabia has a rapidly growing population, with 40% under the age of 25. This demographic pressure creates a need for more jobs, services, and opportunities beyond the oil sector, making economic diversification essential to meet the needs of its youth and avoid social unrest.

What are the potential drawbacks for international investors in Aramco?

International investors may be wary of Aramco due to several factors: Saudi Arabia’s authoritarian government, the lack of transparency in Aramco’s finances, regional instability in the Middle East, and the company’s deep ties to the Saudi royal family, which could lead to political interference in business decisions.

Was the Aramco IPO successful in attracting foreign investment?

The Aramco IPO was not successful in attracting significant foreign investment. Due to lower-than-expected valuations and the challenges of meeting international market standards, most shares were sold domestically, keeping Saudi Arabia’s economy closely tied to oil.

Outlines

00:00

🌏 The Colossal Power of Saudi Aramco

This paragraph introduces Saudi Aramco as a company with immense economic power, surpassing many national economies. It produces over 10% of the world's oil and controls more oil reserves than any country except Venezuela. The company's market value is nearly two trillion dollars, with annual profits exceeding 100 billion, which is more than the combined profits of the top five private oil companies globally. Aramco is also a significant player in petrochemicals and petroleum refining, with refineries worldwide, including the largest in the U.S. The company's decisions have a substantial impact on fuel prices, potentially more so than government decisions.

05:06

📈 Going Public: Saudi Aramco's IPO and Economic Diversification

The paragraph discusses the initial public offering (IPO) of Saudi Aramco on December 11, 2019, on the Tadawul stock exchange. The Saudi government sold only 1.5% of its shares, raising $25.6 billion, which was intended to support the Public Investment Fund's efforts to diversify the economy beyond oil. The goal is to reduce the country's dependence on oil, as the majority of government income and exports are tied to it. The paragraph also highlights the economic challenges faced by Saudi Arabia, including a large population with high growth rates and a significant budget deficit, despite efforts to cut spending and introduce new taxes.

10:10

🛑 Challenges and Complications of Aramco's Global Listing

This section details the difficulties faced by Saudi Aramco in its attempt to go global with its IPO. Initially, Crown Prince Mohammed Bin Salman aimed to list 5% of Aramco on major world markets to raise at least $100 billion. However, due to transparency issues and market reluctance to meet the Saudi government's valuation, the IPO was scaled down to 1.5% on the Saudi stock exchange alone. The paragraph also discusses the geopolitical risks associated with investing in a company from one of the world's most volatile regions, controlled by an authoritarian regime. Despite promises of high dividends, international investors were not willing to pay the desired price, leading to a less successful IPO than initially hoped.

🏦 The Aftermath of Aramco's IPO and Its Impact on Saudi Arabia

The final paragraph examines the aftermath of Aramco's IPO and its implications for Saudi Arabia. Despite the government's efforts to ensure the IPO's success, including pressuring allies and businessmen to buy shares and offering low-interest loans to small investors, the majority of shares remained within the country. This has not significantly reduced Saudi Arabia's dependence on oil, and the government's financial situation remains precarious. The paragraph questions whether the IPO is a setback for Mohammed Bin Salman's plans and highlights the challenges of attracting foreign investment in a country where the government's desires are paramount.

Keywords

💡Saudi Aramco

Saudi Aramco is a Saudi Arabian oil company, fully owned by the Saudi government, and one of the most profitable companies globally. It is central to the video's theme as it discusses the company's massive scale, its IPO, and its implications for the Saudi economy. The script mentions Aramco's control over a significant portion of the world's oil production and its attempt to go public, which is a key event in the narrative.

💡IPO (Initial Public Offering)

An IPO refers to the first sale of stock by a company to the public. In the context of the video, Saudi Aramco's IPO is highlighted as the largest in history, aiming to raise capital for the Saudi government's economic diversification efforts. The script discusses the challenges faced during the IPO process and the ultimate decision to list on the Saudi stock exchange.

💡Economic Diversification

Economic diversification is the process of expanding a country's or company's economic base by developing new industries. The video emphasizes Saudi Arabia's push for economic diversification to reduce its reliance on oil revenues, as indicated by the Public Investment Fund's aim to invest in sectors beyond oil.

💡Public Investment Fund

The Public Investment Fund of Saudi Arabia is a sovereign wealth fund intended to invest in various sectors to reduce the country's dependence on oil. The video mentions that the funds from Aramco's IPO would be directed towards this fund, illustrating the government's strategy to diversify its economy.

💡Market Capitalization

Market capitalization is the total value of a company's shares, calculated by multiplying the number of shares by the share price. The video discusses how Aramco's market capitalization quickly surpassed $2 trillion after its IPO, making it the wealthiest listed company in the world.

💡Vision 2030

Vision 2030 is an ambitious plan announced by Saudi Arabia's Crown Prince Mohammed Bin Salman to reduce the country's dependence on oil and diversify its economy. The video explains how the IPO of Aramco is a part of financing this vision, aiming to create new jobs and alternative revenue streams.

💡Hydrocarbons

Hydrocarbons are organic compounds consisting of hydrogen and carbon and are the primary components of petroleum and natural gas. The video uses the term to describe the raw materials that Saudi Arabia's economy heavily relies on, highlighting the country's addiction to oil and the need for change.

💡Mohammed Bin Salman

Mohammed Bin Salman is the Crown Prince of Saudi Arabia and the chairman of Saudi Aramco. The video discusses his role in spearheading the Aramco IPO and Vision 2030, emphasizing his influence on the country's economic direction and the challenges he faces in implementing reforms.

💡Transparency

Transparency refers to the quality of being open, communicative, and accountable. The video points out that the requirement for transparency was a significant hurdle for Aramco's listing in major international markets, as the company has been historically opaque in its operations and finances.

💡Petrochemical

Petrochemicals are chemical products derived from petroleum and natural gas. The video mentions Aramco as one of the largest petrochemical and petroleum refining groups, controlling refineries worldwide, emphasizing the company's extensive reach in the oil industry.

💡Drone Attack

A drone attack refers to the use of unmanned aerial vehicles to conduct military strikes. The video cites drone attacks on Saudi Aramco facilities as an example of the geopolitical risks and volatility associated with investing in a company based in the Middle East.

Highlights

Saudi Aramco is the largest oil company in the world, controlling more than 10% of global oil production and more oil reserves than any country except Venezuela.

The company's annual profits exceed $100 billion, more than the combined profits of the five largest private oil companies.

Saudi Aramco went public on December 11, 2019, selling just 1.5% of its shares, yet still raised $25.6 billion, marking the largest public offering in history.

The IPO is part of Saudi Arabia's Vision 2030 plan, spearheaded by Crown Prince Mohammed Bin Salman, to reduce the nation's dependence on oil.

Saudi Arabia, unlike smaller Gulf states like Kuwait and the UAE, faces economic challenges due to a growing population and large public deficit, currently around $50 billion.

Aramco's IPO, despite raising headlines and vast sums, was considered not a full success, with only 1.5% sold, far from the initial goal of 5%.

The IPO was not listed on major global markets like New York or London due to transparency and regulatory requirements that Aramco and Saudi Arabia struggled to meet.

Security concerns and geopolitical risks, such as drone attacks on Saudi oil infrastructure, also discouraged international investors from offering higher valuations for Aramco.

Despite Aramco's global dominance, its stock placement was largely supported by local businessmen, regional allies, and government-driven efforts to push the IPO.

The Saudi government leaned heavily on local and regional investors to buy shares, even pressuring companies and allies like the Emirates and Kuwait to contribute.

Although Aramco promised to pay $75 billion in dividends per year, many investors remained cautious, considering the volatile region and Saudi Arabia's opaque governance.

The IPO did little to reduce Saudi Arabia’s overall dependence on oil, as both the government and many citizens' financial stability remain tied to the company’s success.

Crown Prince Mohammed Bin Salman's Vision 2030 plan to diversify the Saudi economy and reduce reliance on oil faces significant challenges despite Aramco’s IPO.

Transparency issues, geopolitical risks, and regional instability make international investment in Aramco less attractive, limiting the potential for large-scale foreign capital inflows.

The success of Vision 2030 and Saudi Arabia's economic future depend on reducing the nation's dependence on oil revenues and developing alternative sectors, a challenging task given the current structure.

Transcripts

Let's do a mental exercise.

Imagine a company whose annual turnover surpasses the economies of many entire countries.

A company that produces more than 10% of all the oil in the world and controls more oil

reserves than any other country, except Venezuela.

Such a colossus would be the greatest business power of all time.

A company that could alter the entire world economy by itself.

That is, a simple board of directors meeting would be more important than virtually any

decision of any government.

Well...

Dear friends of VisualPolitik, that company exists and has now gone public.

Yes, we’re talking about Saudi Aramco.

Ok, you may not have heard of it, but this company controls and manages practically all

the oil fields in Saudi Arabia.

This giant is worth almost two trillion dollars in the market and can reap profits of more

than 100 billion per year.

To give you a comparison, that’s more than the combined profits of the world’s five

largest private oil companies.

It’s a massive difference, check this out:

(CHART)

And what’s more, ARAMCO is also one of the largest petrochemical and petroleum refining

groups.

For example, it controls refineries throughout the world, including the largest refinery

in the United States.

Basically, in terms of fueling a car, this company’s decisions are going to matter

almost as much or more than your own government’s decisions.

So what exactly lies behind this company?

Why has Saudi Arabia put its crown jewel on the market?

And exactly how far can this giant reach??

Listen up.

(GOING ON THE MARKET)

On December 11th, 2019, shares for Saudi Aramco Oil Company began trading on Tadawul, Saudi

Arabia’s stock exchange.

The Saudi government barely sold 1.5% of the shares, but that was still enough to make

it the largest public offering of all time.

They sold shares worth $25.6 billion.

This money will nurture the Public Investment Fund’s coffers, a fund that aims to invest

in companies and sectors beyond oil.

Because that’s the goal.

You see, almost all the countries in the Persian Gulf, which basically only produce oil and

gas, are going crazy trying to diversify their economies so they won’t be so dependent

on these raw materials.

But not everyone is in the same position.

For some countries like Kuwait, Qatar or the United Arab Emirates, this isn’t an urgent

matter.

After all, as we told you before on this channel, they have huge resources, huge reserves of

money, and very small populations.

For example, in this video we told you how Abu Dhabi’s savings surpass one and a half

trillion, one and a half trillion dollars per Emirati citizen.

However, Saudi Arabia’s situation is very different.

The country of the House of Saud does indeed have vast oil reserves, the second largest

in the world after Venezuela, but the problem is that its population is nothing like that

of Kuwait or the Emirates.

That is, in per capita terms, their resources are much, much smaller.

(CHART)

And not only that, Saudi Arabia is a very young country with high population growth

rates.

We’re talking about a country where 40% of the population is under 25 years old.

And yes, historically, oil has allowed them to finance practically everything: large urban

projects, free education and health care, public jobs, a guaranteed income program,

etc.

However, with a significant portion of the population aging, the situation is becoming

increasingly complicated and the fact is that the government has a huge glitch in its public

accounts, a deficit of almost $50 billion per year.

And this figure of $50 billion was only achieved after applying several cuts, new taxes and

after the price of oil recovered.

And still, it’s $50 billion.

And that’s precisely where one of the great protagonists of this story comes into play,

the crown prince Mohammed Bin Salman, of whom we’ve already talked about here on VisualPolitik

and who today runs the country.

You see, in January 2016, Mohammed Bin Salman announced his intention to put 5% of Aramco

on the market to finance his Vision 2030 program, a plan that was born with one goal: to reduce

the country’s huge dependence on oil.

Because almost 70% of all of the Saudi government’s income and 80% of its exports depend on this

raw material.

What’s more, in Saudi Arabia, non-oil activity depends largely on public spending, which

in turn depends on oil.

In other words, it’s very hard to find a sector of the economy that doesn’t, in one

way or another, depend on hydrocarbons.

We’re talking about an economy that’s addicted to black gold.

And of course, in a landscape with more and more producers, where fracking has become

a powerful rival and where concerns for the environment and global warming could curb

oil consumption, this dependence is a problem.

Because if we also consider that the young Saudi population expects a certain way of

life, the country clearly needs to seek alternatives.

And that was precisely the intention, to gradually sell its stakes in Aramco to obtain money

with which to finance other projects, to create new jobs and reduce the country’s dependence

on oil.

But... as we often say, the road to ruin is paved with good intentions..

Here’s a question, do you think that releasing this giant into the stock market was a success?

You could easily be drawn to that conclusion, after all, the Saudi government got more than

$25 billion.

Well... if you think so, you’re very, very wrong.

In spite of the huge headlines that we may have read in the media, the truth is that

Aramco's IPO wasn’t easy or successful.

Let’s take a look.

(THE LARGEST COMPANY IN THE WORLD)

By being listed on the stock market, Aramco has become the wealthiest listed company in

the world.

In fact, within a few days of trading, its market value surpassed $2 trillion.

(AUDIO: Aramco Valuation Hits Crown Prince’s Coveted $2 Trillion Target.

WSJ)

But, just a second, because this the background to this story is very, very different.

You see, when Mohammed bin Salman announced his plans, he wanted to list Aramco in one

of the great world markets, such as New York, London or even Hong Kong, that is, within

reach of practically every investor in the world.

And not only that, he intended to sell 5% of the company in order to raise at least

one hundred billion dollars.

But...

In the end, that entire project ended with the sale of just 1.5% of the shares... and

only on the Saudi Arabia Stock Exchange Market – which financially, is fairly insignificant..

So, the question that crops up is, what on earth happened to cause such a change?

Well, the truth is that going into one of the big markets involved two major problems:

On the one hand, these markets demand high levels of transparency and compliance with

many regulations, for example, the protection of small investors...

And that, for one of the murkiest companies in the world, which has been cashing blank

checks for the Saudi royal family for years, well... just wouldn’t work.

The prospect of transparency for a government that’s used to doing what it wants, when

it wants, and how it wants was all too much.

And on the other hand, there was a much bigger problem, which they couldn’t escape.The

Saudi government was forced to face a harsh reality: the market wasn’t willing to pay

what the Saudi government requested for Aramco.

Yes, it may be the world’s largest oil company and have the lowest extraction costs… but

it’s still a company controlled by one of the most authoritarian and strictest regimes

in the world.

(AUDIO: Aramco should trade at a discount rather than premium to international oil majors.

We rate Saudi Aramco as underperforming.”

Analysts at Bernstein to Financial Times)

And don’t forget that we’re also talking about the Middle East, one of the most volatile

regions on the planet, where it isn’t strange to see things like this:

(AUDIO: May of 2019.

Saudi Arabia Oil Pipeline Damaged in Drone Attack by Houthi Rebels Armed drones forced

shutdown of pipeline; incident follows attack on two of the country’s oil tankers.

WSJ)

(AUDIO: September of 2019 Saudi Aramco reveals attack damage at oil production plants.

Twenty-five drones and missiles were used in the attack that forced the kingdom to shut

down half of its oil production, Saudi Arabia has said.

CNBC)

Not to mention the dire situation of the country’s public accounts.

Because... whatever happens, the truth is that Saudi Aramco will continue to finance

the Saudi government, not just with dividends, but also by paying lots of taxes: No less

than 20% on its income and 50% on benefits.

But even with those payments, the numbers don't add up.

Neither above nor below, not one way or another.

They simply don't add up.

And with a shortfall of $50 billion in the public accounts, how do we know that the Saudi

government won’t repeat what they did in the past?

That is, keep draining the cow:

(AUDIO: If oil prices are lower, you could expect that the state would potentially increase

taxes.

The promise to maintain high dividends to non-state shareholders, he points out, would

not be legally sacrosanct.

Dmitry Marinchenko, Senior Director at Fitch Ratings.)

Well, it’s all these factors that made international investors offer much less money than the Saudi

government expected to get.

And that happened despite the company promising to distribute at least $75 billion per year

in dividends.

So it was those low ratings that forced them to play at home.

And do you know what?

Its placement in the market has been an example of how things work in these countries – badly.

The sales operation had more doping than the Tour de France!

For example, the government “recommended” that big businessmen start buying shares or

suffer the consequences;

They pressured allies such as the Emirates and Kuwait to buy billions of dollars in shares;

Banks had to give loans with extremely low-interest rates so small investors could buy shares,

And a huge advertising and telemarketing campaign were launched.

That is, the government did everything it could to make the operation a success...

Or at least to be able to say that it was.

Because in the end....

most shares stayed at home.

That is, the Saudi economy remains as dependent on oil as it was before.

And even more so, because now it isn’t just the government but also many families’ heritages

that are linked to oil.

(AUDIO: They aren’t doing what they were aiming to do, which is bring in foreign capital.

It’s not a real deal, it’s political.”

A senior banker, who asked not to be identified, speaking to the Financial Times)

The question we need to ask is: Are we looking at a downfall in Mohammed Bin Salman's plans?

In any case, what’s clear is that this attempted global sale has highlighted how things actually

work in Saudi Arabia.

Saudi Arabia is one of those countries where what the government wants is done, at all

times.

And that’s a bad mix, at least if you’re hoping to receive foreign investment.

In short, this is the story of how the Saudi Arabian government decided to begin privatizing

its most valuable assets.

Will it achieve its objectives and decrease its dependence on oil?

Would you be willing to invest your money in a company like Aramco?

Leave your answer in the comments.

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