With the current all-out oil price war, a central role is played by Saudi Arabia, and its state-owned company Aramco. The company is currently offering unseen discounts, and flooding the market with its crude oil, in an attempt to snatch a larger market share and push its competitors into loss. MORE HERE
Saudi Aramco, officially called the Saudi Arabian Oil Company (formerly the Arabian-American Oil Company). The company is entirely state owned by the Kingdom’s government and is the biggest producer of oil on the planet. It is officially based in Dhahran, Saudi Arabia and has an estimated 270 billion barrels in reserves.
It was formed as the product of a Concession Agreement between the Saudi Arabian government and Standard Oil Company of California (SOCAL) in 1933. Aramco began its first drilling operations shortly after, starting its first commercial oil production in 1938.
In 1973, the Saudi Arabian government purchased a 25% interest in Aramco, gradually increasing its stake to 100% in the late 1970s.
Saudi Aramco is led by Amin H. Nasser, its president and CEO. Khalid Al-Falih, chairman of Aramco, was appointed Saudi Arabia’s energy minister in 2016.
The oil company pays a tax rate of about 50% to the Saudi Arabian government, comprising a large share of total revenues from 2015 to 2017. Funding has allowed the company to begin investing in ambitious long-range projects, like smart cities.
It is being run as a commercially independent company, with the government’s budget is highly reliant upon contributions from Aramco in the form of royalties, taxes and dividends. It is by far the world’s most profitable company, eclipsing even tech giants such as Apple Inc. and Alphabet Inc.
This was revealed in April 2019 when ratings agencies released financial information of the long-secretive company before its debut international bond sale, which raised $12 billion.
In September 2019, Saudi Arabia oil facilities came under a powerful drone attack:
Aramco operates differently than the public companies everybody is familiar with.
Saudi Arabia is the primary swing producer in the Organization of the Petroleum Exporting Countries (OPEC), cutting oil production to prop up prices and balance markets when needed.
It also keeps oil production capacity in reserve to call upon in times of shortage.
These decisions are made for market stabilization and political reasons; a company focused on maximizing shareholder value would be unlikely to act in this way.
The decisionmaking process will not change in the wake of the IPO.
Saudi Aramco began to attract increased investor attention in 2016, when Saudi Crown Prince Mohammed bin Salman announced plans to list 5% of Aramco at a valuation of approximately $2 trillion in what may be the largest IPO (Initial Public Offering) ever.
For the first half of 2019, the oil giant reported a profit of $46.9 billion, which is a fall of 12% from the same period in 2018. The given reason was low prices and reduced output.
On December 11, 2019, shares amounting to 1.5% of Aramco’s value began trading only on the Tadawul, Saudi Arabia’s stock exchange.
The IPO will raise nearly $26 billion for the kingdom, at a price that values Aramco at $1.7 trillion.
The Saudis postponed the IPO a number of times, but a management shake-up in September 2019 was the first step in getting the process moving again. The push for progress on the IPO was derailed in mid-October, when bankers informed Aramco management and Saudi officials that international investors were expected to value the company at between $1.1 and $1.7 trillion.
Transparency and valuation have been the biggest challenges since the Aramco IPO was announced nearly four years ago.
In September 2019, an Iran-blame attacked damaged Aramco’s oil facilities and could have led to global shortages in demand, if spare capacity and a rapid repair program were not employed.
The reduced valuation of Aramco was the final straw that ended the kingdom’s dreams of a huge international IPO. Citizens feel a sense of pride in Aramco as their national champion and the heart of their economy, making the stock attractive to local buyers, and the Saudi government offered incentives to local buyers.
When it came to the market, Aramco stock initially spiked, reaching the Crown Prince’s sough-after $2 trillion valuation. Aramco shares have since faced new pressures from heightened tensions in the Gulf region. Aramco’s market cap now stands at about $1.86 trillion, as of mid-January 2020.
For the first time since the its listing, Aramco’s shares fell down under the initial IPO on March 8th, to $8.24, by 6.36%. This was a direct result of the oil price war initiated earlier, following the failure of OPEC+ to negotiate lower production from April 1st onwards. Saudi Arabia launched unprecedented discounts and began flooding the market in an attempt to capture a larger share, so that it could secure its revenue that supports the Riyadh government.
Starting from April 1st, Aramco is expected to increase its output to 10.3 million barrels per day, or even closer to 11 million. Its current output is 9.7 million, and the entire Saudi capacity stands at 12.5 million.
Up until now, OPEC+ has been effectively cutting production by 2.1 million bpd, as Saudi Arabia has been reducing its own output by more than agreed.