- [Narrator] So, you're an investor,
you're looking for
places to put your money,
and you keep hearing about what could be
the biggest IPO of all time.
Saudi Aramco.
- [Man] The world's
biggest share offering.
- [Woman] The biggest IPO in history.
- [Narrator] To be clear,
the share sale is happening
on the local stock exchange, the Tadawul,
and it's mostly aimed at Saudi Arabians.
- It's on ATMs, it's on billboards.
The state-owned newspapers
are advertising it.
Banks are offering loans for people
to buy shares in Aramco.
- [Narrator] Aramco isn't
just any old company.
It's the most profitable one in the world.
Its desired valuation,
even on the low end,
dwarfs corporate giants
like Apple or Amazon.
But its road to going public
has been long and complicated.
- Taking the world's most
profitable company to market
has not been an easy job.
- It's all about the valuation.
- After years of delay and
amid new security threats
posed by rival Iran.
- Saudi Aramco announcing plans of course
to list on the Tadawul.
- [Narrator] So, is Aramco
a good bet for investors?
There are a few things
you need to consider.
First is how Aramco makes money.
Simply put, oil.
And that's great when
oil markets are strong,
but going all in on one
asset, in this case oil,
means you're exposed to its value.
And that value changes a lot.
In 2018, Aramco turned a bigger profit
than any other company.
Still, the company's
third-quarter net income this year
was down 30% from the same time last year.
That's in part because
of lower oil prices.
With all of the uncertainty
around the price of oil,
it's hard to tell if Aramco can grow.
And experts can't even agree
on how much the company is actually worth.
A very basic way to look at Aramco's value
is based on how much oil
Saudi Arabia has underground.
In 2018, the kingdom controlled nearly 18%
of the world's reserves.
If Aramco could make a roughly $8 profit
on each of those barrels,
that would give it a
$2 trillion valuation.
But Aramco's latest price target
falls $300-$400 billion
short of the $2 valuation
the Crown Prince was aiming for.
That lower price target
acknowledges some risks
Aramco's business faces,
like tensions in the Middle East,
the price of renewable energy,
and demand for electric cars.
And Aramco's prospectus
acknowledges that climate change
could have a negative
impact on its business.
The energy market is changing,
and Aramco may have to change too.
In 2018, roughly 34% of the world's energy
was fueled by oil,
but there's only so
much oil to be drilled,
and the market for renewable
energy is on the rise.
The share of renewables in
global energy consumption
is expected to grow from
4% today to 15% by 2040.
The oil industry has been under pressure
from regulators and
politicians around the world
to help develop cleaner
alternatives to fossil fuels.
- So a lot of the oil majors globally
have been making investments
in the last couple of years
into new energy businesses.
And these can be wind farms,
it can be electric
vehicle charging stations.
But at this stage we're not
seeing any big moves by Aramco
into renewable energy.
- [Narrator] While Aramco itself
isn't investing much in renewable energy,
the country of Saudi Arabia wants to.
The Crown Prince plans
to use some of the money
raised from Aramco's IPO
to make his country less reliant on oil
by investing in things like technology,
tourism, wind, and solar power.
He can do that because the Saudi Kingdom
technically owns Aramco,
and the Crown Prince can potentially
do what he wants with the company,
as long as the government controls it.
That's another big
question among investors.
Even after an IPO,
it might be hard to know exactly
where the Saudi government
starts and Aramco ends.
Just look at Aramco's board.
Six of the 11 members have
current or former ties
to the Saudi government,
and the government's priorities are baked
into Aramco's business plan.
Its prospectus even says Aramco
might do things for the Saudi Kingdom
even if it doesn't make
the most sense financially.
- The Saudi Kingdom is
the shareholder of Aramco,
so it has absolutely
been in the driving seat
of whether or not this IPO goes ahead.
And that has been one of the reasons
that the IPO has been repeatedly delayed
since it was first announced in 2016.
The other issue is ESG,
environmental social governance issues.
These have been things that investors
have been growing
increasingly concerned about,
and there's definitely some
issues around that for Aramco,
around environment, around human rights.
- [Narrator] In 2018, Jamal Khashoggi,
a journalist who was critical
of the Saudi Kingdom's leadership,
was murdered by Saudi operatives.
While the United Nations and CIA
have implicated the Crown Prince
in the ordering of the murder,
the kingdom has denied his role.
After the murder, some investors
publicly distanced
themselves from the country
by dropping out of a big
Saudi business conference.
Now the Saudi government's
role in Aramco's future
is unclear.
Aramco is only putting a small
percentage of its business
up for sale,
so the kingdom will still
own most of the company
after the IPO.
That doesn't just present an
ethical dilemma for investors.
It raises tangible security concerns too,
since Aramco could be a target
for countries at odds with Saudi Arabia.
Just think back to September,
when a drone attack briefly wiped out
half of Aramco's oil production.
Saudi Arabia blamed
Iran for the airstrikes,
but Iran has denied its involvement.
The cost of recovering from
these September attacks
were part of the reason
Aramco's net profits for Q3
were down 30% from last year.
And Aramco's prospectus said
terrorism and armed conflict
could have a significant
impact on its business.
While it took less than
a month for the company
to return to its original
production output,
the attacks showed investors
that Aramco is facing
some pretty serious security risks.
Even being the world's largest
or the world's most profitable company
doesn't mean it will
necessarily be successful
after it goes public,
and the IPO isn't expected to be
the big global offering it
was initially pitched as.
After pressure built up
from international investors
to disclose more information
about its business,
Aramco decided to gear the IPO
mainly towards Saudi investors.
Aramco declined to comment on a story
about its IPO obstacles,
and the Saudi government said the IPO
has gone "according to plan from day one."
- So is Aramco a good bet?
Well, they are guaranteeing a dividend.
But on the flip side, it is hard to see
what the story for this
company will be in future
as we move through the energy transition,
away from fossil fuels and
into more new energies.
(gentle music)
