The Kingdom of Saudi Arabia’s financial regulator officially approved the initial public offering for its state-run oil company Aramco on Sunday. Saudi Aramco, the world’s most profitable company, is going public on the stock exchange at last, a move which has been discussed since 2016. This could result in the largest-ever IPO.

Last week, the Capital Market Authority of Saudi Arabia announced that Aramco will begin trading on the Saudi Stock Exchange, or Tadawul, after years of discussions on the topic. As the world’s most profitable company, Aramco generated $111 billion in net income and $86 billion in free cash flow in 2018 alone. Its valuation is currently between $1 trillion and $2 trillion which places its worth above more than the entire $550 billion Saudi equity market.

The Wall Street Journal has concluded that the Aramco will be worth more than all Brazilian, Korean, Australian, Swiss and German stocks. Considering the prospects, Aramco intends to pay $75 billion in cash dividends next year, an astonishing 30 times more than Apple’s $2.6 billion distributed to investors in 2018.

Furthermore, Saudi Aramco has the world’ largest oil reserves compared to any other company. Its extraction costs are also relatively low, at $2.80 per barrel, a lot less than any of its competitors. It is no secret that Saudi Aramco is an incredibly appealing company to own stocks in, but the real question here is, should you invest in it?

Despite all the positives of the company, Aramco may struggle to convince foreign investors to look past some of the negative aspects.

Apart from the fact that, for now, the shares will be available only on the Tadawul exchange, the public float which the company is planning will be in the neighbourhood of 2 percent of shares which makes this a very small debut considering the large size of the company.

Furthermore, the rest of the shares will be owned by the crown prince and the House of Saud. This distribution is a reflection of absolute monarchy in which foreign investors are unlikely to secure any shareholder rights. Ellen Wald’s commentary on the issue from the New York Times states that, “The money raised from the Aramco IPO, and any subsequent offerings, will not go to the company. It will go to Saudi Arabia – to the king and his government.” This may have serious implications for ithe future. However, the kingdom hopes that the move will generate billions of dollars which will be put towards economic development plans as it attempts to tackle high unemployment and reduce its dependency on the oil industry.

Before the company is able to float on the Saudi Stock Exchange, however, a range of regulatory procedures are required to be fulfilled. Mohammad Elkuwaiz, chairman of the domestic stock exchange, commented that any waivers or exemptions for the company’s listing are still in discussion. In addition to that, the Hong Kong Stock Exchange and the London Stock Exchange have expressed a particular interest in floating Aramco shares on their respective exchanges, but the regulation for that is still unclear.

Ellie Nikolova

Saudi Aramco's IPO - Should You Invest?