IPO prospectus lays out main risks to Aramco's operations

Saudi state oil giant Aramco unveiled the prospectus for its initial public offering (IPO) on Saturday, laying out the main material risks that may adversely affect the company's business or its financial position.

Aramco is the world's largest oil producer, pumping 10% of global supply, and it's most profitable. Weaker oil prices cut its first-half net profit by 12% to $46.9 billion this year, but the figures still overshadowed Apple Inc, the world's most profitable listed company, which made $31.5 billion.

Below are the main risks, according to the prospectus:

Operations

Operations may be affected by global oil prices, oil supply and demand, economic and geopolitical events that may affect international trade as well as the impact of climate change on the demand for, and price of, hydrocarbons.

The Saudi government determines the kingdom's maximum level of oil production. State finances are highly connected to the oil and gas industry.

Aramco's operations may be affected by decisions regarding output levels made by the kingdom as a member of the Organization of the Petroleum Exporting Countries (OPEC), or by other producing states.

The Saudi government may direct Aramco to undertake projects or provide assistance for initiatives outside its core business.

Aramco's financial position may be adversely affected if the kingdom stops pegging its currency, the riyal, to the US dollar.

Insurance

Aramco does not insure against all risks and its insurance may not protect it against liability from all potential events including major crude oil spills, environmental disasters, terrorism or acts of war.

Litigation

Aramco has been subject to significant litigation, including allegations of violations of antitrust laws partially arising from the kingdom's OPEC membership. The OPEC-related antitrust lawsuits have been dismissed on the basis of sovereign defences under US law, but there is no assurance the firm will prevail in its assertion of these defences in the future.

Terrorism And Conflicts

Political and social instability, unrest, actual or potential armed conflicts in the Middle East and North Africa and other areas may affect Aramco's operations and financial position. Terrorism and armed conflict may materially and adversely affect the market price of its shares.

Reserves

Estimates of proven hydrocarbon reserves depend on significant interpretations, assumptions and judgements. Any significant deviation in economic and operating conditions could affect the estimated quantity and value of proven reserves

Aramco retained independent petroleum consultants, DeGolyer & MacNaughton (D&M), to independently evaluate its reservoirs as of December 31, 2018.

D&M's reserves estimation of 209.1 billion barrels of oil equivalent reserves for the reservoirs it evaluated was within 1% of the company's internal estimation for the same reservoirs for the same concession time period.

There is no independent third party certification letter with respect to the balance of the kingdom's proven oil equivalent reserves.

The Offering

The IPO is expected to be the largest issuance to trade on the local Tadawul stock exchange, which modernised its platform to accommodate the exceptionally high trading volume. Changes to trading mechanisms and procedures are untested and there can be no assurance they will adequately facilitate the listing.

Non-qualified foreign investors will not hold legal title to the shares and will not be able to vote according to the shares in which they hold an economic benefit.

All purchases and sales of shares on Tadawul will be denominated in local currency. There is no guarantee foreign investors will have the ability to obtain the riyal in amounts necessary to purchase the desired amount of shares or swap.

The Saudi government will continue to own a controlling interest after the IPO and be able to control matters requiring shareholder approval. It will have veto power with respect to any shareholder action or approval requiring a majority vote.

Aramco may change its dividend policy without prior notice to its minority shareholders. Aramco said it intends to declare ordinary cash dividends of at least $75.0 billion for the calendar year 2020, in addition to any potential special dividends.

Furthermore, if necessary, the government will forgo its right to receive cash dividends for the next five years starting from 2020 to enable the company to first pay the minimum quarterly amount to other shareholders.