What Is Saudi Aramco?

Saudi Aramco is by far the world's most profitable company, eclipsing even tech giants such as Apple Inc. (AAPL) and Alphabet Inc. (GOOGL), according to data revealed in April 2019 by the long-secretive company. It's also one of the largest companies in the world by revenue.

The oil giant began to attract dramatically increased investor attention last year when Saudi Crown Prince Mohammed bin Salman announced plans to list 5% of Aramco at a valuation of approximately $2 trillion in what could have been the largest IPO ever. The kingdom halted the plan due to several factors, but Saudi Arabia has indicated that it “remains committed” to an offering “at a time of its own choosing when conditions are optimum.” Some experts say rising oil prices in 2019 might be that optimal time.

It's unclear how investors' reception to a Saudi Aramco IPO would be affected by negative publicity related to allegations that Crown Prince Mohammed bin Salman was a key force behind the alleged murder of Washington Post journalist Jamal Khashoggi.

Until this year, Saudi Aramco’s financials had not been available to the public since the company was nationalized in the late '70s. The oil company made its financial information available in a prospectus tied to a $10 billion bond sale planned for 2019. Saudi Arabian Oil Company, the petroleum and natural gas firm, is officially based in Dhahran, Saudi Arabia.

Full-year profits came in at $111 billion, several times bigger than the annual profit of oil and gas rival Royal Dutch Shell (RDS.A), the largest publicly-traded oil company. For comparison, iPhone maker Apple, the world’s most profitable public company, generated $59.4 billion in profit in 2018, a little more than half of Saudi Aramco's bottom line.

Credit rating firm Moody's attributes the ultra-high profit numbers to the company’s economies of scale. The company produced an average of 13.6 million barrels per day in 2018, more than three times Exxon Mobil Corp.’s (XOM) daily production average.

Per Moody’s, Saudi Aramco generated sales of about $360 billion in 2018, and had $48.8 billion of cash on the books at year-end. This compares to debt of $27 billion, per CNN.

Saudi Aramco 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. Over the next decade, the company rapidly expanded across Saudi Arabia, reaching crude oil production of 500,000 barrels per day in 1949. In order to keep up with production, the firm built out its distribution pipeline and built the Trans-Arabian Pipeline, the longest in the world.

In 1973, the Saudi Arabian government purchased a 25% interest in Aramco, gradually increasing its stake to 100% in the late 1970s. In the late 1980s, the Saudi Arabian Oil Company (Saudi Aramco) was officially established. In 1989, in an effort to transform itself from an oil-producing and exporting company to an integrated petroleum enterprise, Aramco formed a joint venture with Texaco in the U.S. By 2017, the Saudi oil behemoth had became the sole owner of North America’s largest single-site crude oil refinery at Port Arthur, Texas. Throughout the 1990s, it continued to build alliances and partnership deals around the world. In recent years, the company has stepped up efforts to diversify its business, investing heavily in R&D to expand into nonmetallic and crude-to-chemicals products.

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. In June, Aramco named six new heads of departments after a government reshuffle moved a handful of executives to other state posts, per Reuters.

The oil company pays a hefty tax rate of about 50% to the Saudi Arabian government, comprising a large share of total revenues from 2015 to 2017, according to Fitch Ratings. The funding has allowed the company to begin investing in ambitious long-range projects, like smart cities. Moody's attributes its A1 rating for Aramco, below peers like Chevron and Exxon, to the company's credit links to the government of Saudi Arabia, per CNBC.

"While there is a clear track record of Aramco having been run as a commercially independent company, the government’s budget is highly reliant upon contributions from Aramco in the form of royalties, taxes and dividends," wrote Moody's senior credit officer Rehan Akbar.

Some speculate that Saudi Aramco's latest financial disclosures, including about its profits, stem from the company's renewed plans to go public. But in the short term, the filing is part of its plan to obtain a credit rating to raise funds to buy a 70% stake in Saudi petrochemicals company Sabic for about $69.1 billion. Aramco is reportedly preparing for a massive $10 billion bond offering to finance the deal.

As mentioned, Crown Prince Mohammed bin Salman announced plans to list 5% of Aramco in what could have been the largest IPO in history. Proceeds from the offering, totaling $100 billion, were central to a plan by the Saudis to diversify the oil giant. Yet in August, the kingdom dropped those immediate IPO plans as the company encountered numerous challenges, including deciding where to list the shares. While the New York Stock Exchange contended for the listing, Chairman Al Falih told reporters that he would not want to subject Aramco to the risk of “litigation and liability” required by the U.S. exchange.

Many have noted that the IPO could have forced the government to divulge state secrets, including the size of its oil reserves, per CNN. These numbers were later included in Saudi Aramco's recent report. Plans for the company's public debut also have stalled as some market watchers argue that the company’s real value is far lower than estimates by the crown prince. At the estimated $2 trillion valuation, Aramco would trade at roughly 344% of the combined value of Exxon Mobil and Chevron.

Despite this skepticism, Saudi Arabia has indicated that it's committed to an IPO at a later date. Some market watcher say 2019 may be an ideal time to do that. Oil prices are up dramatically from their 2016 lows, and the U.S. stock market just posted its best quarterly gains in years.