Saudi Aramco
| Case Code: FINC136 Case Length: 16 Pages Period: 2016-2017 Pub Date: 2018 Teaching Note: Available |
Price: Rs.400 Organization: Saudi Aramco Industry: Oil and Gas Countries: Global Themes: - |
Abstract Case Intro 1 Case Intro 2 Excerpts
Introduction
In early 2016, it was reported that Saudi Arabian national petroleum and natural gas company Saudi Aramco (Aramco), the world’s largest oil exporter with access to the world’s second largest proven oil reserves, was seeking proposals to float an IPO. Though Aramco was a state-owned company, the monarchy represented the state, that is, the Kingdom of Saudi Arabia, and thus had significant influence over the management of Aramco. Until 2016, Aramco had to pay 85% of its earnings as tax to the government and some undisclosed proportion as royalties to the Saud family,
the royal family of Saudi Arabia.
In March 2016, the crown prince of Saudi Arabia, Mohammad bin Salman bin Abdulaziz Al-Saud (Prince Salman), announced that 5% of Aramco would be floated. He claimed it would be valued at $100 billion. The value of Aramco was, therefore, estimated at $2 trillion. Such valuation dwarfed Silicon Valley tech giants such as Apple and Google. Besides, the $100 billion float would be a record IPO and amount to four times the size of the largest IPO ($25 billion Alibaba IPO in 2014) to float on any stock exchange across the world. Aramco was likely to float on the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE) sometime in early 2018. The proposal for an IPO was part of a plan to diversify and transform the economy of Saudi Arabia, which was mainly dependent on oil exports, by 2030, known as Vision 2030. The proceeds of the IPO would go toward building a new nation which would play a greater role in the world economy. Vision 2030 to diversify the economy was spearheaded by Prince Salman who was seen as a modernizer.
The Saudi economy, which depended heavily on oil (oil and gas accounted for nearly 44% of the GDP and to 85% of the export earnings), was severely impacted by the oil price slump post 2014. Not only was the fiscal deficit 6 widening but the foreign reserves of the Kingdom were also depleting at such a rate that within five years Saudi would be forced to take massive loans. Partial monetization of the state-owned Aramco had thus become necessary...
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