Executive Summary

1) The IPO of Aramco will help drive the Company’s transformation from a market leader in oil and gas (“O&G”) into a diversified conglomerate operating at a global scale.

2) The IPO will provide the necessary capital to ensure continued success in legacy operations, while also positioning the company for market dominance in ancillary industries like petrochemicals and potentially even solar / renewable technologies.

3) Having a presence in the public markets creates a currency the Company can use to make acquisitions or forge strategic partnerships.

4) The IPO will help advance the important goals stated in Vision 2030.

Introduction

Saudi Aramco is the most valuable corporation in the world – with a market capitalization of about $2 trillion USD. It is known for its impressive efficiency, global reach and highly competent team. Total profits were $111 billion USD in 2018. That sort of sum is staggering. According to the Economist, Aramco 2018 profits exceed the combined profits of the five supermajors (ExxonMobil, Royal Dutch Shell, British Petroleum, Chevron and Total). 260 billion barrels of proven reserves can be found underneath Aramco’s roughly 500 reservoirs. Aramco has five times the proven liquid reserves of the combined supermajors (data courtesy of Reuters).

Perhaps the most remarkable aspect of Aramco is the Company’s ability to extract oil at minimal financial and environmental costs. The chart below, also courtesy of the Economist, shows that Saudi Arabia has the lowest CO2 emissions per barrel in the industry. In terms of extraction cost, Aramco is able to extract oil at approximately $2.80/barrel, far below the international average of approximately $7/barrel. At the recent Atlantic Council Energy Forum 2020, Western and Arab business leaders had a productive discussion on the importance of sustainability in O&G. Saudi Aramco has an impressive ability to extract, process and distribute O&G resources in an environmentally friendly manner; which will be even more critical as the global community pushes for reductions in C02 emissions. Aramco’s unrivaled economic efficiency and minimal environmental costs will continue to be a major source of competitive advantage going forward.

ESG (environmental, social and governance) issues took center stage at the Atlantic Council Energy Forum 2020. In the 21st century, it is critical that companies are good stewards of the habitats and communities they operate in. Aramco has an outstanding program designed to train its workers, upskill them, and prepare them for more significant roles. The Company has also invested in building wildlife reserves. The Shaybah wildlife sanctuary, at 637 square km, is one of the largest fenced reserves in the world. The IPO will provide additional capital to fund these strategic, long-term initiatives such as research and development, training workers, and environmental stewardship.

The IPO as a Catalyst for Growth and Diversification

Saudi Aramco is currently engaged in a major transformation. Rather than be the market leader in only one sector, the Saudi government has outlined in the Vision 2030 plan that Aramco should be a dominant player in multiple sectors. The ultimate goal, according to the Vision 2030 plan, is for Aramco to become a global industrials conglomerate. Aramco has been making compelling acquisitions and forging strategic partnerships with that goal in mind. Two transactions are of particular importance: the 70% stake purchased in Sabic and the 20% stake purchased in Reliance’s refining unit.

The Aramco investor relations documents outline the strategy behind these moves in depth. Fundamentally, the acquisitions and strategic partnerships are designed to move across the value chain and to attain deeper market penetration. Sabic is one of the top five producers of petrochemicals, which have widespread applications and steady demand. Uses of these petrochemicals range from industrial fertilizers to consumer plastics. On a separate note, the Reliance refinery partnership will help strengthen Aramco’s presence in India – a fast growing nation with over 1 billion citizens and significant energy needs. Aramco executives have highlighted their interest in strengthening their relationships in Asia. South and East Asia are likely to demand more oil and energy resources as they continue their rapid pace of development. The rationale behind the Reliance partnership is strong in both the short- and long-terms.

Generally speaking, there are three reasons to launch an IPO:

1) Some shareholders would like to sell their stakes, while others would like to continue being owners of a firm.

2) The cost of capital in public equity markets creates an attractive financing option for corporate operations and capital expenditures.

3) A firm would like a “currency” with which it can acquire stakes in other companies. Being publicly traded, a firm can easily finance acquisitions with debt, equity, cash or an appropriate mix.

For Saudi Aramco, only the 2nd and 3rd benefits are relevant. A potentially lower cost of capital, along with shares that can be used for acquisitions, are clear and compelling benefits of the IPO. The IPO of Saudi Aramco will be a growth driver of legacy operations. Crucially, it will also serve as a force multiplier – giving the management team more versatility in terms of financing its operations and strategic initiatives.

The IPO in the Context of Vision 2030

It is important to understand the IPO and its implications in the context of Vision 2030. Vision 2030 is an ambitious plan to grow the Saudi economy, diversify the nation’s economic activities, and to create well-paid, plentiful job opportunities throughout KSA. Vision 2030 specifically outlines several sectors that KSA is particularly poised to excel in: “oil, petrochemicals, banking, telecommunications, food, health care, and retail.” Vision 2030 also states that the revenues generated from legacy industries (O&G, petrochemicals) will be used to incubate new sectors of the economy – especially technology driven businesses. The IPO of Aramco is an early step in allowing the government of KSA to increase or decrease its position in Aramco as it deems appropriate. The IPO is not constraining the management of Aramco, or the government of KSA; the IPO is going to provide optionality and flexibility.

Concluding Remarks

The Kingdom of Saudi Arabia has been blessed with tremendous assets, including natural wealth. Oil, gas, gold, precious stones and other minerals are the most obvious signs of the natural resources of the Kingdom. The solar and wind potential in the Kingdom are also vast and impressive. The Kingdom’s people are ready to rise to new heights of prosperity and development, heights outlined in Vision 2030. The IPO of Aramco will be a catalyst of these coming achievements. The Kingdom, with the benefits of the IPO, the strength of its people, and its natural resources will be in a position to drive major breakthroughs in science, business and culture – making the Kingdom a “wellspring of radiance for humanity,” in the words of the late King Faisal.

*********************************

My name is Charles Mouaikel and I am a student at Cornell University studying Applied Economics and Management graduating in May 2020. I spent two summers working for the Royal Bank of Canada. I spent the most recent summer at Lincoln International, an American investment bank. At Cornell, I am a Fellow at the Emerging Markets Institute where I research economic development and technical innovation in Asia. I am also a World Economic Forum Global Shaper. I am the Founder and Inaugural President of Energy@Cornell, the University’s leading undergraduate energy think-tank. Through Energy@Cornell, I have hosted lectures given by Prime Minister of Canada Stephen Harper (fmr.), Andy Karsner of Google, and Dr. Allan Adams of the MIT Future Ocean Lab; among other distinguished experts on energy, economics, and trade.

I can be reached via email at charles.mouaikel@gmail.com or via phone at +1 (315) 955-9905. Please note  that all views expressed in this opinion piece are mine and mine alone. I am very grateful for the opportunity to visit the Kingdom of Saudi Arabia, discover its proud heritage, and learn about its exciting future.