When the biggest initial public offering (IPO) in history is announced you are sure to be interested in learning what it is all about and whether it presents an investment opportunity that is worthy of your attention.
The Saudi Aramco IPO was announced at the end of 2019 and the price of $8.53 for the IPO meant that it surpassed the previous record for an IPO held by Alibaba, which raised $25 billion.
Here is a look at the background of Saudi Aramco, which has been deemed to be the world’s most profitable company.
A sense of perspective
One of the most obvious questions raised about investing in a state-owned oil behemoth is the fact that the world is attempting to tackle climate change head-on and that means there is a collective shift away from fossil fuels, and that means Aramco is selling what is predicted to be an obsolete fuel source at some point in the future.
Of course, we are a long way away from that point, although global demand for crude is predicted to slow noticeably from 2025 onwards.
So does that mean that Saudi Aramco can justify its huge $1.7 trillion valuation, making it the world’s most valuable company?
Heading in a new direction
The fact that the company is a global giant within an industry that is going through seismic change is the fundamental point behind the IPO.
Diversification away from oil is the ultimate goal and the IPO allows the business to seek out new technologies and opportunities that will maintain the kingdom’s level of wealth and carve out future-proof jobs for its growing population.
The main reason why Saudi Aramco decided to launch an IPO is to help with the country’s transformation plan, although it should also be pointed out that investing in the business comes with a fairly unique political risk.
It has to be remembered that the Saudi government owns the company, and also relies on its revenues to fund most of its economy. It is unusual to invest in a company with that political background and there is always an element of risk that the fortunes of the government and the direction it takes in the future, could have an impact on its valuation.
The fundamentals
The Saudi Aramco IPO raised a staggering $25.6 billion, but that represents only 1.5% of the company, which gives you a sense of perspective about the scale of the business.
Interestingly, despite being formed much later than its main rivals, companies such as Shell, Chevron, and BP, it easily muscles out these competitors in terms of market capitalization and revenues. It achieves this feat with fewer employees than its rivals.
Saudi Aramco has been managing to increase revenue each year, but at the same time, it has also managed to reduce production costs and cut its carbon footprint. It has managed to trim production costs down to about $7.50 per barrel and its overheads run at around $1.50 per barrel, which gives you an idea of the profitability of the business.
The largest IPO in history has allowed Saudi Aramco to diversify and its expansion plans are already well underway, and it has certainly got money to spend after raising funds via the listing.
