Business

Saudi Aramco aims to raise $100 billion in a future 2018 IPO

Saudi Aramco, a natural petroleum and natural gas company, is planning on going public in 2018 in order to raise $100 billion. They have claimed that the company is worth more than $2 trillion, but they may have to settle for a smaller valuation.  

It is difficult to evaluate a company and come up with a reasonable, accurate valuation. It is even harder to do so when the company has never released any financial statements.

No one, except those with close ties to Aramco, has any knowledge as to whether the company is doing well and has great growth potential, or if it is in financial ruin and unappealing to potential investors.

Lacking this crucial information, financial analysts are forced to rely on production numbers and industry statistics for data.

Aramco has previously been valued at between $8 trillion and $10 trillion, which would make it the world’s most valuable company by market capitalization, according to The Wall Street Journal.

However, because of a lack of reputable, publicly available financial information about the company, this is only a speculative valuation.

More recently, Wood Mackenzie Ltd. claimed that Aramco’s rough valuation is only around $400 billion, according to Bloomberg.

For a company like this, it is very important that investors know about the firm’s cash flows and its ability to pay dividends to its stockholders. Aramco needs to release its financial information to the public.

The company’s high valuation, coupled with its lack of disclosure, is sure to deter risk-averse investors from purchasing Aramco stock.  

Aramco is currently undergoing a complete financial restructuring in preparation for the initial public offering scheduled for late 2018.

This is meant to make the prospect of investing in the company more attractive. One of the main reasons why the company is planning this IPO is because it will help reduce its dependency on oil, even though the resource is its core competency.

Aramco has officially hired JPMorgan Chase & Co. and HSBC as the underwriters to help the IPO launch, which will be a monumental challenge. The overly optimistic expectations of Aramco will be countered with the concerns of potential investors.

The major concerns are related to both the company itself and the oil and gas industry as a whole. Alternative energy sources and electric cars could become more widespread in the future, and this could have a negative impact on the oil market. According to Bloomberg, since Aramco is owned by the state, investors should take additional precaution.

Out of the 14 countries that comprise the Organization of Petroleum Exporting Countries, Saudi Arabia is the largest, with the value of its petroleum exports worth over $134 billion. Fifty percent of the country’s gross domestic product is accounted for by the oil and gas sector. Aramco is a state-owned company that produces 10.5 million barrels a day.

The company also has subsidiaries in China, Egypt, Japan, India, the Netherlands, the Republic of Korea, Singapore, the United Kingdom and the United States. As part of OPEC, Saudi Arabia is supposed to work toward the common goal of stabilizing the world prices of oil.

The price of crude oil has been steadily averaging $58 in the last 12 months. Aramco is putting all of its efforts behind increasing this price before its IPO, in order to increase its potential valuation.

The $100 billion Aramco plans to raise will be used for the Vision 2030 project, a plan to reduce Saudi Arabia’s dependency on oil and diversify the country’s economy by the year 2030.

Since Saudi Arabia is a major player in the world’s oil market, whatever actions Aramco takes will likely affect other countries’ economies worldwide.

Aramco could easily affect the price of oil by colluding with the other OPEC members to limit the supply of oil, which would result in a price increase. Within the last five years, the United States has experienced oil prices ranging from approximately $29 to $157 per barrel.

Oil is one of the most influential factors in the economy, affecting the cost of transport, energy production, food production, material production and many other industries.

Oil is necessary to operate key machinery and equipment in a variety of areas. Some sectors of the economy are totally reliant on oil production, and the oil and gas industries are leading providers of high-paying jobs for Americans.

The fluctuating price of oil has a significant, widespread effect. This is one reason why economists and analysts are keen on monitoring Aramco. They want to see whether its actions will significantly affect oil prices.

October 23, 2017

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