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Gregory Brew

Gregory Brew

Dr. Gregory Brew is a researcher and analyst based in Washington D.C. He is a fellow at the Metropolitan Society for International Affairs, and his…

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Cooking The Books? Saudi Aramco Could Be Overvalued By 500%

The world’s most valuable oil company, Saudi Aramco, is approaching its first IPO in 2018, as the government of Saudi Arabia prepares to sell off portions of the company in order fill a sovereign wealth fund crucial to the country’s transition away from an oil-based economy.

Saudi Aramco is worth $2 trillion, according to Riyadh, and its five percent initial offering could yield $200 billion. This would be the largest IPO in history, blowing away the offering of China’s Alibaba in 2014.

The problem, however, is that the company itself may not be worth as much as the Saudi government claims. Recent reports and growing skepticism regarding Aramco’s actual worth have cast some doubts on whether the world’s largest IPO will be as earth-shattering as originally thought.

The original estimate offered by Saudi Arabia, which placed Saudi Aramco’s worth at around $2 trillion, was based on a valuation of Saudi Arabia’s oil proven reserves, 261 billion barrels. Multiplying at $8 per barrel, those reserves alone are worth $2.088 trillion. When Saudi Crown Prince Mohammed bin Salman made that original estimate, it garnered some skepticism: how could any company be worth such an astronomic sum?

Now, analysts at Wood Mackenzie have conducted their own study of Saudi Aramco, and came up with a completely different (and much lower) figure. WoodMac puts Aramco’s true value closer to $400 billion, eighty percent less than the Saudi estimate, and it arrived at the figure by considering future demand and the anticipated average price of oil (on which profits will depend), as well as Saudi Aramco’s status as a state-run company.

WoodMac doesn’t dispute the figure of 261 billion barrels lying under Saudi Arabia and just offshore; that figure has been confirmed by independent sources. Where things get complicated, though, is in the management and taxation of Saudi Aramco, which does not release financial statements. It is known that the company, which is the bedrock of the Saudi economy and the major foundation for state finances, pays a twenty percent royalty on revenues and an 85 percent income tax, supporting the Saudi government and providing a living for the 15,000 members of the Saudi royal family. Tax commitments of that size could have a major impact on the company’s profitability, leaving little in dividends, a factor WoodMac considered in its valuation.

There’s also the question of investors demanding discounts for investing in state companies. Bloomberg noted that Saudi Arabia, while a comparatively stable Middle Eastern nation, could encounter the kinds of problems and instabilities plaguing other resource-rich countries with large, state-run energy companies. There are questions surrounding the viability of the country’s long-term economic plan, Vision 2030, which anticipates a major shift in the Saudi economic outlook away from oil and gas and towards greater diversity.

Bloomberg also noted that the Saudi tactic of computing the company’s price according to its held proven reserves doesn’t add up: Russia’s Rosneft, by that accounting, should be worth $272 billion instead of its current value of $64 billion, while the value of ExxonMobil, the world’s most valuable private energy firm, would be fifty-three percent less.

Other commentators who spoke to Bloomberg off the record put the company’s true value somewhere between $500 billion and $1 trillion.

WoodMac has predicted prices in 2017 to remain relatively stable, if OPEC continues to abide by its production agreement, and believes the average price will be as high as $57 per barrel. But looking further ahead, the firm (and other forecasters) are uncertain how electric cars, climate change, technological improvements and changes in demand will affect prices.

This uncertainty also affects the estimates surrounding Aramco’s real worth. Massive Saudi reserves are large enough to sustain current production for another 73 years, so the forecast looks good. But while Riyadh expects peak crude oil demand to come in 2035, other forecasters are much more pessimistic: OPEC has indicated that peak demand could come in as little as a decade, while others are hinting it could come even earlier.

A major facet of the Vision 2030 plan is the surety of future world oil demand: the Saudis must hope that Saudi crude remains attractive and competitive, even as it moves its economy away from relying solely on Aramco’s business. And even if the country sells off its state-run company, Saudi interest and investment will remain closely tied to world oil, as the recent decision to invest $7 billion in an oil processing plant in Malaysia makes plain.

So, even if Saudi Arabia succeeds in selling off Saudi Aramco, perhaps for $2 trillion or perhaps for much, much less, it’s economy and the well-being of its royal family will depend on the world’s demand for oil and gas.

By Gregory Brew for Oilprice.com

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  • Jhm on February 28 2017 said:
    Oil reserves are only worth what can be produced over the next ten years. Major reserves are in a huge bubble. They need to liquidate now. The production oversupply will persist.
  • Matthew Abbasi on February 28 2017 said:
    The entire Saudi Vision 30 is a mirage.....this dream is based on the assumption that Saudi society can retool itself to a make a population that is not used to working into a diversified power house. What else do you expect? The 31 year old Prince whom drafted this plan is the Defense Minster, Economy Minster, and has many other portfolios but he has ZERO experience to handle any of it. His sole qualification is that he is the King's son. Further, 50% of Saudis (Women) have virtually no role in this society. They cannot even drive a car! Moreover, the royal family are like leeches....they are sucking ARAMCO dry so anyone who invests in this company will not see any real dividend from their investment. Finally, the House of Saud is right up there with Iran as a terror sponsor. ISIS is basically Saudi so the West should not fund these killer. All in all this is just a bad IPO.
  • Norman Pagett on March 01 2017 said:
    Saudi wouldn't be selling if there was any real long term value left
  • Tom on March 04 2017 said:
    There is no rule of law in Saudi Arabia. The King can reclaim what he sold at any time. He can change the terms of the agreement on a whim. When oil prices fall he needs to claim every dollar of oil revenue to feed his unproductive breeders.

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