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Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Aramco Valuation Comes Under Scrutiny

Saudi Crown Prince Mohammed bin Salman says Saudi Aramco should be valued at $2 trillion for its initial public offering, but its true value will only be known when the company releases its financials next year.

Because Aramco’s reserves are a staggering 266 billion barrels, the valuation of each of those barrels is particularly important. If, for example, each of those barrels get a $7 or $8 valuation, the $2 trillion valuation seems possible. But that’s not all what IPO valuations are based on.

Investors use many of other metrics—financial ones—to measure an oil company’s worth, and Aramco’s finances will not be known until next year, ahead of the planned IPO.

According to one such globally accepted metric for oil industry giants—enterprise value vs. earnings before interest, tax, depreciation, and amortization (EBITDA)—in order for Aramco to reach a company valuation of $2 trillion, it needs to report an EBITDA of around $130 billion next year, according to Reuters estimates.

And this could prove quite challenging for the Saudi firm. No company ever—not only in the oil industry but in any industry—has reported such a high EBITDA figure, or EBITDA of more than $100 billion, according to Reuters. Related: World’s Largest Car Market Turns To Electric Vehicles

To compare, Apple, for example, the most valuable listed company in the world, is now worth more than $830 billion and its 2015 EBITDA was just $82 billion.

Reuters data shows that Exxon Mobil reported EBITDA of $23 billion last year, and the world’s biggest listed oil firm currently has a market capitalization of $335 billion. At peak oil prices, Exxon’s EBITDA was $65 billion in 2012, but a barrel of oil is half the cost today that it was then.  

Core earnings at $130 billion would be necessary for Aramco to match the ambitious EV/EBITDA ratio of Exxon, Reuters calculations show.

Commenting on whether the state-run company would meet those numbers, the PR office said:

“This is highly speculative. We do not comment on speculation or rumor.”

The overall aura of seclusion and anti-information will be difficult to manage when international investors start calling to confirm the health of their new investment.

Currently, Aramco produces over 10 million barrels per day of crude at some of the world’s cheapest production rates. Its global refinery network and related assets only add further value.

That being said, investors need to prepare to own a piece of a company that they cannot hope to control. So far, it appears that only 5 percent of Aramco will see an IPO, making it difficult for any moneyed investor to hope to have a real say in the company’s operations.

Related: Russia’s Big Bet On Kurdish Oil

“Based on the Saudi current-account balance, Aramco had revenues of $160 billion last year from just oil and refined products exports when the average price of oil was $43 a barrel,” Fareed Mohamedi from the Rapidan Group said. “So if the price of oil goes to $70 per barrel, it is not impossible for Aramco to make a top line of $250 billion a year. Given that operational costs of Aramco are one of the lowest in the world, it is not impossible to see them reporting the bottom line or earnings on a huge scale – of $100 billion a year and above.”

Country risk is also a huge issue for investors to work out before Aramco goes public. The Tadawul platform for trading companies within Saudi Arabia has been relatively stable in recent years, but will Riyadh be as liberal with a company that represents basically all of the country’s massive fossil fuel wealth? Time will tell.

By Zainab Calcuttawala for Oilprice.com

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  • Bonaventure Stephen Gomes on September 12 2017 said:
    At its best, Saudi Aramco's P& L earnings can be placed at US$100 billion and US$200 billion for US$50 per barrel of oil and US$75 per barrel of oil respectively. However, the earnings of Saudi Aramco must fuel the government expenditures of the Saudi Arab government, and development of Saudi Arabia. Assuming these expenditures @ 50%, the earnings before interest and depreciation fall, respectively, to US$50 billion and US$100 billion. Saudi Aramco's joint venture entities are separate entities and therefore would not add to the valuation of Saudi Aramco. So an IPO of 5% on proposed valuation would yield, respectively, barely US$0.25 and US$0.50, assuming the IPO is issued at par which is very unlikely.

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