Saudi Arabia's Newest Capital Raising Effort

Saudi Aramco, the state-owned oil company of Saudi Arabia, is increasing oil production in advance of its partial IPO. While global oil production has been decreasing, Saudi Arabia has decided to stop regulating production levels and dismissed the idea of stabilizing global supply and demand. The oil giant is preparing for its first public offering, offering about 5% of the company.

Saudi Aramco is already producing over 10 million barrels a day, a very high level. While the CEO claims the planned increase in production isn't out of the ordinary for the summer months, it comes at a time when other companies are cutting back on their production in an effort to stabilize prices. Saudi Arabia's strategy is possible due to their rock-bottom production costs, less than $10 per barrel.

The company's shares will be made available on Saudi Arabia's Tadawul market in the capital of Riyadh, as well as potentially in New York, London, and Hong Kong. This IPO will value the company at over two trillion USD, which would make it about four times the size of Apple and over five times the size of ExxonMobil. Some analysts disagree with this valuation, and believe that oil would have to be trading at much higher levels for the $2 trillion figure to be accurate.

A big concern for investors could be the amount of taxes the company pays to the Saudi government, 93% to be exact. Saudi Aramco effectively gives all of its revenues to the state, making investor's wonder how they will get a share of the profits.

Saudi Arabia's economic downturn is a foreign concept to its government, which receives 75% of its GDP from oil. Government officials are struggling to come up with ways to combat this economic decline. They've started taxing their citizens for the very first time and have also cut back on military spending and other government projects.

The company was initially reluctant to offer shares because it would mean opening their books to the public. Transparency is not something Saudi Aramco and the royal family are used to or are necessarily prepared for. This IPO may result in their having to explain extravagant spending habits to the public.

Saudi Arabia is undergoing a process of breaking their "resource curse" and developing other parts of the economy. The cash from this IPO will go towards the country's Vision 2030 in which they plan to completely diversify away from oil. Other efforts so far for this Vision 2030 include new ministers for its water, energy, health, and transportation departments.

Saudi Aramco believes that this partial IPO will be just the beginning of kickstarting foreign investment into a country which, up until now, had been doing perfectly fine without it.