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Saudi Aramco IPO: What to Know About Public Offering of the Most Profitable Company in the World

Pop Test: What's the Most Profitable Company in the World? Apple? Google?

No. These two are not even approaching. The answer is Saudi Arabia's state-owned oil company, Aramco. In 2018, Saudi Aramco made $ 111 billion in profit. Apple's second-most-profitable company made $ 60 billion this year.

On November 3, Aramco officially announced its plan to publish for the first time in the company's 86-year history. And on November 17, the oil giant announced that the company could be valued at $ 1.7 trillion. Energy historian Ellen R. Wald joined Today, explained to explain why Aramco's initial public offering (IPO) was such a big deal.

As the most profitable company in the world, according to her, the company IPO will set big records. And since it is the largest oil company in the world, it is likely that many of the everyday things we use ̵

1; from the plastic to the energy that powers our cars – affect that company.

"In the United States," Wald says as an example, "Aramco has the largest refinery in the whole country. And she also owns Shell gas stations in the Southeastern United States. So many Americans can buy oil – or gasoline – it's made by Aramco, and they don't even know it. "

But some say that the timing of the IPO for Aramco couldn't be worse. One reason for this: Some people believe that the world has or will soon reach peak oil demand. explains Wald, the "PR nightmare" that Saudi Arabia created with the assassination of Saudi dissident journalist Jamal Hashogi:

[The killing of Jamal Khashoggi] has definitely defrauded investors and financiers about Saudi Arabia as a whole. The idea is that the money from this stock sale would go to support the the Saudi Arabian monarchy that has done and continues to do very much dream about things like human rights. … And so there are many people who look at it and say, "No, I don't touch this because I don't want to help these people."

To understand the meaning Aramco's upcoming IPO, you need to know the history of the company. If you want to know all about this, here's a slightly edited transcript of Wald's conversation with Today, explained by host Sean Rameswaram.

Subscribe to Today, explained wherever you get your podcasts, including: Apple Podcasts Google Podcasts Spotify Stitcher and ART19 .

Sean Rameswaram

What exactly takes Saudi Aramko from an extremely profitable oil company to the world's most profitable company?

Ellen Ward

The real key year here is 1972. The United States can no longer pump more oil to meet the growing demand. So instead of managing America's huge thirst for oil at the time, they had to import oil from elsewhere. And one of the great sources for that was Saudi Arabia. And Saudi Arabia was pumping and pumping more to meet that demand. All those gas cars, they answered that demand.

And the Saudis took that into account. At that time, the Minister of Petroleum was called Zaki Yamani, he and other oil-producing countries in the Middle East were already united in the cartel organization known today as OPEC [the Organization of the Petroleum Exporting Countries].

And they came together and basically said, "We know you're in trouble and we want to raise the price of oil because the price of oil is just too low." And they talked to representatives of major oil companies, including the US, and they could not reach an agreement. And they said, “You know what? We cannot reach an agreement. [So] we will unilaterally raise the price of oil. "

They do this in connection with the 1973 Arab-Israeli war, along with the oil embargo. And the effect was very immediate. The price of oil jumped sharply and actually triggered a recession in the US.

But it also helped oil companies to make a lot more money than that, including Aramco and including the Saudis. And what did the Saudis do with all that money? Well, they put it in their own palaces and in their own country. But they also used it to buy the company and then in 1988, the Saudis eventually saw

Sean Rameswaram

How did [the company] change from what it was in the 70's to now?

Ellen Ward

In the 70's, Aramko was basically They pumped oil from the earth and most of it was sold as crude oil to the four US companies that owned it, now it's much more like an international oil company like BP, Exxon or Royal Dutch Shell. or Total because they pump oil, they have crude oil assets, but they also have a set of what we call me "downstream assets," which are refineries, petrochemical companies. And they have them in Saudi Arabia, but also all over the world.

Sean Rameswaram

What is the relationship between this company and the Saudi Arabian monarchy right now? Ellen Ward

It's much harder now than it was. Their first CEO at the time, a Saudi man named Ali al-Naimi, negotiated with the King to keep Aramko separate from the Saudi government. Yes, they have a board of directors appointed by the government that approves their plans. But essentially, they decide how much money they want to spend on capital expenditures, what projects they want to do and what their strategy is. And this is unique among national oil companies.

So Aramco is not a completely national oil company, but it is not a private oil company either. He is somewhere in the middle and has a high degree of independence. However, this is changing. And we have seen this change occur after the ascension of King Salman [bin Abdulaziz Al Saud] to the throne, as well as his son, the young Crown Prince Mohammed bin Salman, and they play a much more active role in the larger strategy of the company.

They don't try to manage it every day, but they say things like, "We want to buy this petrochemical company," or "we want to make it public, and here's how it goes." Aramco has to cope with so much independence. And it created some tension.

Sean Rameswaram

It sounds like you are saying that it is difficult to separate the Saudi monarchy from Aramko.

Ellen Ward

It's hard to separate them from Aramco in terms of big decisions. Aramco is not nearly as intertwined with government as any other national oil company. But that's the real problem with this IPO. Usually, when a company makes an IPO, the money will go to the company to expand, to do new things, but this is not the case.

The Monarchy wants to make money from Aramco shares and to take that money they make from the sale of shares and invest it in things not related to the company. Thus, they want to invest it in their sovereign wealth fund, which is intended to invest in both Saudi Arabia companies to support economic development and diversification, as well as international companies worldwide. And use it to invest in technology companies and all kinds of crazy companies they've invested in, such as Magic Leap Virtual Reality or Technology Company or Uber or Tesla.

Sean Rameswaram

This is supposed to be one of the richest countries in the world, right? How do they need the money for some "sovereign wealth fund" to fund startups?

Ellen Ward

Saudi Arabia has essentially a one-trick economy that sells oil. And they handled it pretty well. But this does not always go very well for the overall economy, it does not necessarily require everyone. This does not encourage small business development. This does not encourage a viable economy.

What if the oil price tank stays low for a long time? What if the oil runs out? The oil will leak out at some point. So the Saudi Arabian government has come up with a plan that is designed to diversify the economy so that they are no longer fully dependent on a single commodity.

Sean Rameswaram

Any idea how this IPO will go in December?

Ellen Ward

One of the interesting things is that this company makes $ 111 billion in profit. That's what made a profit in 2018. I think Apple is the next most profitable company, [and] made only $ 60 billion in 2018

And people won't throw that aside, especially in the market today, when so many IPOs that come up are companies that don't even make a profit and have never made a profit and can never make a profit. So when an IPO for a highly profitable company comes up, it's very difficult to respond.

If an IPO doesn't go very well – and there's a good chance it may not go very well – it could affect other oil companies' revenue. Although I would say that if it does not go well, it is more a reflection of the Saudi government than of Aramko himself.

If the IPO does not go very well and the politically Saudi monarchy looks bad, it can be very large-scale, especially for the US, which maintains strong diplomatic ties with Saudi Arabia. This is something that people should definitely be on the lookout for; this could in some way potentially radically change the balance of power in the Middle East.

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