Saudi Aramco - The Price of Oil
The world's most profitable company is about to go public. By now you've probably heard of Saudi Aramco - if you haven't, it's a Saudi Arabian state owned oil company that officially announced its plan to go public for the first time in the company's 86 year history on November 3rd.
So what made Aramco the most profitable company in the world?
The really key year here is 1972. The United States could no longer pump more oil to meet rising demand. So instead of being able to accommodate America’s vast thirst for oil at the time, they had to import oil from elsewhere. And one of the big sources of that was Saudi Arabia.
But as the world moves away from oil and further toward sustainable resources and electric cars, how will this impact Aramco's financials?
Saudi Aramco made $111 billion dollars in profit last year. To put that into perspective, Apple made $60 billion - and they're the second-most profitable company in the world. I mean.. wow! Irrespective of what your views may be on oil - that's impressive!
So why are foreign investors not impressed?
The world remembers that just last year a Saudi prince assassinated a journalist that criticised the Saudi government, so the idea that the money from this share sale would go to support the Saudi Arabian monarchy has been a deterrent for many foreign investors. Politics aside, they're only offering 0.5% of the company to the public at a $1.2 trillion plus valuation.
Private companies typically grow faster in terms of valuations compared to public companies - as private company valuations don't fluctuate on a daily basis and aren't subject to public scrutiny. But once a private company reaches a 1 billion valuation, if their goal is to IPO, this is usually the time to do it.
When you take a company public you need to show investors that you can continue to grow so they can gain a 10x plus return.
At a $1.2 trillion plus valuation already, that could be a challenging feat, particularly when the supply of oil may be high but the future demand is relatively unknown as the world moves further towards other, more sustainable resources.
Either way, this IPO would make history and we'll be watching it.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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