Business·Analysis

Saudi Aramco is now the world's most valuable company - but for how long?

The Saudi kingdom has been talking about selling some shares of its prized oil giant for years. But the Saudi Aramco IPO comes during a rough time for global oil producers.

In its first day of trading, Saudi Aramco soared to a valuation of $1.9 trillion US

Shares of Saudi Aramco began trading on the Tadawul Saudi Stock Exchange in Riyadh on Dec. 11. (Hamad I Mohammed/Reuters)

It's official: Saudi Aramco is the biggest, most valuable company in the world. 

As oil prices remain stubbornly low and giant hedge funds vow to stay away from big energy investments, Aramco raised a record-setting $25.6 billion US in its much-anticipated initial public offering on Wednesday. In its first day of trading, it soared to a valuation of $1.9 trillion.

For context, Apple was trading at a mere $1.2 trillion.

"[Aramco] pumps 10 per cent or more of global crude supplies," said Scotiabank commodities economist Rory Johnston. "It produces more than two times the amount of oil produced in all of Canada."

Aramco's size and scope is hard to fathom. It is the sole oil company in Saudi Arabia and it has, by far, the lowest costs of any oil producer in the world. To produce a barrel of crude, Johnston said it costs Aramco "probably somewhere in the ballpark of five to 10 dollars." By contrast, a barrel in Alberta's oil sands costs up to $30 US to produce.

"It's not just the largest oil company, it's also by a long shot the most profitable oil company," said Johnston.

Why did Saudi Aramco go public?

The Saudi kingdom has been talking about selling some shares of its prized oil giant for years. It has said it wants to use the money to help diversify away from such a strong reliance on fossil fuels. It only offered about 1.5 per cent of the company for public listing. The rest remains firmly in the hands of Saudi's autocratic royal family.

But the IPO comes during a rough time for global oil producers. Crude prices have fallen (again) and investments in energy projects have dried up. Aramco's prospectus predicted peak global demand would come by 2040, but some oil analysts say it could happen as early as next decade. 

The Aramco IPO comes during a rough time for global oil producers. (Hasan Jamali/Associated Press)

Few believed the oil giant would reach its lofty valuation target of $2 trillion. Many valued the company closer to $1.2 trillion. Still, the Saudis stuck to their guns. Just last week, Saudi Energy Minister Prince Abdulaziz bin Salman said it was only a matter of time before the sceptics would be eating their words.

"In a few months from now … I wouldn't call them by names, but I think they would probably like not to have written those pieces that they have written," said the prince. "We will get Aramco and it will be higher than the two trillion [dollars], and I can bet that this will happen."

How has Aramco stayed profitable in a waning market?

In a lot of ways, the global downturn in oil and gas is why Aramco is so incredibly valuable. Jackie Forrest, the director of Arc Energy Research, said the company made a staggering $111 billion in profit last year.

In an episode of her podcast, Arc Energy Ideas, Forrest said other oil companies will struggle to make money if prices remain low. But Aramco will just keep grinding out profits.

"Because you're so low-cost," said Forrest, "even when prices get very low, you can still provide a return to investors."

Oil industry legend Daniel Yergin at consultancy IHS Markit called Aramco an "asset class of one."

How much transparency is there in Aramco's business?

There simply is no other company like it — but that cuts both ways.

It's solely owned by the royal family of Saudi Arabia, a country that is not a democracy and where there is no outside accountability.

"This is an absolute monarchy. One of the few left in the world," said Ellen Wald, author of of the 2018 book Saudi Inc.: The Arabian Kingdom's Pursuit of Profit and Power.  

The Saudi monarchy is currently at war in Yemen, has a long and well-documented history of human rights abuses and has faced international outrage over the 2018 killing of journalist Jamal Khashoggi. But the government has no obligation to tell shareholders what it will do with the money they invest in Aramco.

"The money is going to go to the Saudi government," said Wald. "And they're going to use that money for whatever ends they want. They say they want to use it to diversify the economy to make investments. But we don't know that's how they're going to use the money."

The Aramco IPO is part of a high-stakes plan by Saudi Crown Prince Mohammed bin Salman to prepare the country for a future less dependent on oil. (Jacquelyn Martin/The Associated Press)

Indeed, as long as it has existed, Aramco has been shrouded in secrecy. Forrest said that has kept investors guessing for her entire career.

"In the past, people literally made a living trying to predict some of the stuff that's now in the prospectus and available to read," she said.

Transitioning from total control to at least some required transparency may prove difficult for Aramco. Johnston said the original plan was a split listing on stock exchanges in London, New York and Riyadh. But concerns were raised that assets in New York could be open to seizure in the event of lawsuits against the Saudi government. 

Why was the IPO delayed?

Some believe the level of transparency required in New York and London were simply too much, too quick. Johnston said those concerns may have helped erode estimates of how much the company would be worth.

"Part of it was the downturn in the price of oil. Part of it was the degree of transparency that was required in disclosures by some of the exchanges," said Johnston.

In the end, Aramco listed on the Riyadh exchange to a primarily domestic clientele, where the Saudi royal family maintains strict control.

Hundreds of Saudi businessmen and princes were detained at the Riyadh Ritz Carlton in an anti-corruption crackdown in 2017. At the time, many saw it as a consolidation of power and a purge of rivals by Crown Prince Mohammed Bin Salman. If the Saudi government required its wealthier citizens to buy shares in Aramco or hold them longer than they intended, there's not much question that it could.

Oil traders in New York will have to wait for a chance to trade Aramco shares. For now, the oil giant is only listed on the Saudi exchange. (Mary Altaffer/Associated Press)

Will the Aramco IPO ultimately be seen as a success?

The IPO will test whether investors still have an appetite for oil and gas. The same issues plaguing the energy sector in Alberta are hurting investment around the world. There's just too much oil sloshing around world markets right now.

Aramco's differences when it comes to operating costs and access to oil reserves set it apart. Jackie Forrest calls Aramco the "crown jewels" of the oil industry, and there's no question the company will last longer and remain profitable longer than any of its rivals. But Wald wondered if investors would be "comfortable supporting the monarchy." 

The answer came as soon as trading began. Aramco's shares soared in value.

About the Author

Senior Business reporter for CBC News. A former host of On the Money and World Report on CBC Radio, Peter Armstrong has been a foreign correspondent and parliamentary reporter for CBC. Twitter: @armstrongcbc

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