Prospectus and Market Evaluation – Saudi Aramco

Prospectus and Market Evaluation – Saudi Aramco
Your Name
Subject and Section
Professor’s Name
August 26, 2023
1. Strategy and Business Models of the Company: a. Historical Roots & Global Emergence: Born from the deserts of Saudi Arabia in the 1930s, Saudi Aramco did not merely ride the tides of the oil boom; it came to epitomize the pulse and flow of the global energy market. Harnessing the vast underground treasure troves of hydrocarbons, Aramco strategically positioned itself as an energy behemoth. b. Integrated Oil Operations: It is not just about extracting oil from the ground but about orchestrating a symphony of operations. From the meticulous exploration of the delicate act of production to the art of refining and the vast distribution network, Aramco's business strategy intricately weaves these processes together, allowing the company to control and capitalize on every facet of the oil and gas value chain. c. Bridging Continents with Downstream Activities: Aramco is not confined by the Kingdom's borders. It casts its net far and wide, especially into the Asia-Pacific corridors, tapping into the region's insatiable appetite for petrochemicals and refined products. It is a forward-looking strategy that seeks to bridge demand with supply across continents. d. A Visionary Horizon - Vision 2030: This is not just a blueprint but Saudi Arabia's dream canvas. Led by the ambitious Crown Prince Mohammed bin Salman, Vision 2030 paints a future less tethered to the whims of oil prices. With its tentacles reaching into various energy spheres, Saudi Aramco is envisioned as the driving force behind this transformative journey, moving beyond just black gold to embrace an evolving energy palette (Saudi Aramco, 2019). 2. Why do you think the company needs to go Public? a. The Capital Infusion Symphony: At the heart of any IPO lies the rhythm of capital generation. For Saudi Aramco, the melody was no different. By inviting the world to own a piece of its legacy, the company aspired to channel the IPO’s symphonic proceeds into a plethora of developmental cadences, all harmonizing with the goals of Vision 2030. b. A Tapestry of Economic Nuances: Aramco has been the golden goose of the Saudi economy. However, the corridors of power in Riyadh have been astutely aware of the perils of placing all their bets on one card. The IPO is the first in a series of intricate stitches, weaving a diversified economic tapestry, making the Kingdom less vulnerable to the tremors of oil price oscillations (Wald, 2018). c. Unveiling the Veil: In the dance of global enterprises, transparency is not just a step but the entire choreography. As Aramco pirouetted onto the stock exchange stage, it unveiled its operations, signalling a commitment to operate under the spotlight, potentially luring foreign maestros to invest in the Kingdom's broader economic orchestra. d. Navigating the Oil Price Labyrinth: Step back to the 2010s. The oil landscape was less a serene painting and more a volatile mosaic. The rise of U.S. shale and OPEC's evolving strategies made the oil markets a labyrinth. Within this maze, Aramco's IPO was a beacon, underscoring Saudi Arabia's unwavering intent to remain the global energy market's compass, regardless of the challenges. e. Beyond Just Numbers - Valuation: Before the gavel went down on the IPO, the whispers around Aramco's valuation echoed in every financial hall. The public offering was Riyadh's statement, an attempt to etch a definitive mark on its most precious asset's value. Not just a reflection of its subterranean reserves but a testament to its profitability, structural prowess, and potential to navigate the energy transition odyssey. 3. Investment Bank(s), Underwriter(s), and Selling Agent(s): a. Principal Underwriters & Investment Banks: For Saudi Aramco's IPO, a blend of major global and regional banks was assembled, each contributing a specified portion to underwrite the offering: i. Citigroup Saudi Arabia, Credit Suisse Securities (Europe) Limited, Goldman Sachs International, J.P. Morgan Securities plc, Merrill Lynch Kingdom of Saudi Arabia, and Morgan Stanley & Co. International plc: Each of these entities underwrote 180,000,000 shares, accounting for 6.00% of the offer shares individually (Saudi Aramco, 2019). ii. HSBC Saudi Arabia, NCB Capital Company, and Samba Capital & Investment Management Company: These were among the most significant underwriters for the IPO. Each one undertook 450,000,000 shares or 15.00% of the offer shares. iii. Al Rajhi Capital, GIB Capital, Riyad Capital, and Saudi Fransi Capital: These institutions underwrote 75,000,000 shares each, representing 2.50% of the offer shares. iv. A range of other global banks, including Banco Santander, BNP PARIBAS, BOCI Asia Limited, Crédit Agricole Corporate and Investment Bank, Deutsche Securities Saudi Arabia, EFG Hermes KSA, First Abu Dhabi Bank PJSC, Mizuho International plc, RBC Europe Limited, SMBC Nikko Capital Markets Limited, Société Générale, and UBS AG, London Branch: Each of these took on 22,500,000 shares, making up 0.75% of the offer shares.The combined force of these global and regional banks ensured that Saudi Aramco's colossal IPO was successfully underwritten, with the total offer shares reaching 3,000,000,000 or 100% of the available stake. 4. Type of IPO: a. Greenshoe Option: The IPO by Saudi Aramco incorporated what is known as a "greenshoe option" or an over-allotment. In the financial world, the greenshoe option is a mechanism that permits companies to issue more shares than initially planned in their IPO, especially when there is significant demand from investors during the initial offering phase (Reuters, 2020). i. Initial Offering Details: Saudi Aramco, the state-owned oil behemoth, raised $25.6 billion in its December IPO by offering 3 billion shares priced at 32 riyals (equivalent to $8.53) each. However, Aramco had signalled that there was a possibility of selling additional shares through the over-allotment mechanism. ii. Exercise of Greenshoe: With the robust demand, Aramco eventually decided to exercise its greenshoe option, issuing an additional 450 million shares. This move successfully increased the size of its initial public offering, pushing it to an unprecedented $29.4 billion, making it the largest IPO in history up to that point. iii. Purpose and Outcome: The greenshoe option underscores Aramco's strategic foresight and adaptability. By doing so, they tapped into the surplus demand during the IPO and augmented the total capital raised. Aramco clarified that the allocation of these additional shares was already decided upon during the book-building process and emphasized that no new shares would be introduced to the market as a result of the over-allotment option's execution. iv. Post-IPO Valuation: Post its listing, Aramco's share prices exhibited some volatility due to geopolitical tensions, particularly between the United States and Iran. Notwithstanding these fluctuations, the closing price soon after the IPO positioned Aramco's valuation at $1.87 trillion, surpassing its IPO valuation of $1.7 trillion. However, it fell slightly short of the ambitious $2 trillion target that Crown Prince Mohammed bin Salman initially set.
Saudi Aramco's IPO was not just a capital increase but also used the greenshoe option to leverage additional demand and raise more funds than initially anticipated. This strategic move reaffirms the company's significant standing in the global financial landscape and its ability to navigate international markets' complexities.
5. Use of IPO ProceedsSaudi Aramco's IPO is projected to yield proceeds of SAR 96,000,000,000 ($25,600,000,000 USD, using an exchange rate of 1 USD = SAR 3.75).This projection does not factor in any possible funds from the Over-allotment Option. a. Recipient of the Proceeds:The proceeds will be fully allocated to the Selling Shareholder. Although Saudi Aramco carried the costs associated with the offering, it will not directly benefit from these funds. However, Saudi Aramco will be reimbursed by the Selling Shareholder for all the expenses tied to the IPO (Saudi Aramco, 2019). b. Expenses Overview:Cost of Sales (Year ending December 31 2018): • Changes in inventories: SAR 83,322,735 ($22,219,127 USD) • Employee-related costs: SAR 13,294,298 ($3,545,147 USD) • Depreciation of assets: SAR 13,903,349 ($3,707,561 USD) • Asset write-downs: SAR 470,183 ($125,382 USD) • Intangible asset amortization: SAR 529,906 ($141,313 USD)Total: SAR 111,520,471 ($29,738,793 USD)
General and Administrative Expenses (Year ending December 31 2018): • Employee-related: SAR 5,923,083 ($1,579,223 USD) • Tech & Research: SAR 1,163,468 ($310,251 USD) • Professional services: SAR 1,834,609 ($489,229 USD)• Administrative support: SAR 514,064 ($137,088 USD)• Asset depreciation and amortization: SAR 643,089 ($171,492 USD)• Maintenance: SAR 288,079 ($76,822 USD) • Miscellaneous: SAR 578,515 ($154,137 USD)Total: SAR 10,944,907 ($2,918,641 USD)
Selling and Distribution Costs (Year ending December 31 2018): • Shipping: SAR 7,995,009 ($2,132,003 USD) • Employee-related: SAR 1,578,477 ($421,060 USD) • Leases: SAR 389,374 ($103,833 USD) • Marketing: SAR 153,468 ($40,925 USD) • Asset depreciation: SAR 59,737 ($15,930 USD) • Miscellaneous: SAR 223,872 ($59,704 USD)Total: SAR 10,399,937 ($2,773,317 USD)
Additional Note:In Q1 2018, a one-time expense of SAR 1.38 billion ($368,000,000 USD) was recorded due to a strategic workforce optimization effort predominantly related to severance payments. This strategy was aimed at reducing the Group's recurrent expenditures.
6. Advantages and Disadvantages of Offerings: a. Pros: i. Capital Boost: The IPO will inject capital into Saudi Arabia's oil-based economy, buffering against fluctuating oil prices. This helps in diversifying investments and lowers dependence on oil prices. ii. Global Vision: The Aramco IPO aligns with Saudi Arabia's Vision 2030, showcasing the country's dedication to economic evolution and global financial involvement. iii. Enhanced Transparency: Addressing international calls for openness, a transparent IPO indicates a move towards a more inclusive Saudi economic approach.iv. Geopolitical Strength: As a globally traded entity, threats to Saudi Aramco could affect global markets, possibly fortifying Saudi Arabia's geopolitical position.
b. Cons: i. Geopolitical Risks: Past attacks on Aramco facilities highlight the risks. The IPO means any future regional tensions can influence global investors, too. ii. Greater Scrutiny: Saudi Arabia's previous controversies could mean heightened oversight for Saudi Aramco, potentially linking its financial performance with political events. iii...