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Tsvetana Paraskova

Tsvetana Paraskova

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Trillions or Billions – What Is Aramco’s IPO Actually Worth?

Saudi Oil

Since Saudi Arabia said last year that it planned to sell a small portion of its crown jewel Aramco, analysts and industry specialists have been questioning the Kingdom’s evaluation of the oil giant – a mind-boggling US$2 trillion. As the provisional timing set for the IPO – 2018 – is drawing nearer, Saudi Aramco has been busy picking advisers for what would be the world’s biggest share sale ever, if the company were indeed to be valued at around that US$2 trillion figure.

Meanwhile, analysts have been trying to put a price tag on the oil giant using metrics such as cash flow expectations and the current tax regime for the company in Saudi Arabia, rather than just multiplying the 261 billion barrels of crude oil and condensate reserves Aramco claims to have by US$8, a benchmark to value reserves. The latest evaluations of the company put its value at between US$400 billion and just below US$1 trillion, according to analysts, investors and industry executives who had spoken to Bloomberg.

Shortly after the Saudis first announced plans for selling shares in Aramco, Robert Powell of the Economist Intelligence Unit told The Telegraph in May 2016 that the US$2 trillion evaluation of the company could be plausible, given the vast reserves and low cost of production. Related: Saudi Arabia Eyes $60 Oil

$2 trillion is a relatively mind-blowing figure but Exxon is about $360bn-$370bn and they have nothing like the reserves or the extraordinarily low cost base that the Saudis enjoy. It’s plausible,” Powell told The Telegraph.

A year later, however, analysts are more cautious in putting a trillion-dollar value to a company that has never published financial reports and pays 20 percent royalties on revenues and a hefty 85-percent income tax to fill in the government coffers of Saudi Arabia, which relies on oil for much of its budget revenues.

Energy consultancy Wood Mackenzie has valued Aramco’s core business at around US$400 billion, Bloomberg says, quoting Wood Mac clients who had attended a private meeting earlier in February. Wood Mac’s evaluation does not include the downstream business, and is based on the current tax rate, a cost of capital of 10 percent, and an in-house forecast of the price of oil.

One person familiar with the IPO plans told Bloomberg that Aramco may currently be worth US$500 billion, factoring in the tax rate, while another person in the know has placed the value at just below US$1 trillion, based on the expected capability of Aramco to generate cash flows.

Any evaluation of the Saudi giant includes hefty assumptions and lacks specific figures, given the Kingdom’s reluctance to share its oil secrets with the world, being a swing producer and leader of OPEC, which has been fixing—or trying to fix—the global price of oil.

Therefore, political considerations will have a big say in the Saudi plans for Aramco’s IPO, and will weigh on global investors’ appetite to buy into the company when part of it goes public.

Although Aramco’s CEO Amin Nasser told Bloomberg in January that the tax rate would certainly be amended in a way that is similar to other listed companies, investors could still be wary to put their money into a company that is so politically entangled, putting more downward pressure on the company’s total value. On the other hand, a lower tax rate would mean lower recurring income for the Saudi budget. Related: Cooking The Books? Saudi Aramco Could Be Overvalued By 500%

In addition, some members of the very large Saudi royal family are unhappy with the plan by the king’s son, Deputy Crown Prince Mohammed bin Salman, for the IPO, because listing on a western stock exchange would bring independent auditors to the Kingdom who will evaluate how Aramco’s revenues are distributed in the budget and whether the royals spending some off-budget revenues from oil sales, according to the New York Times.

There is also concern and dissent among the Saudi public, who have seen cuts in their perks since the oil prices crashed, making it more difficult for citizens to see what the personal benefit from Aramco’s IPO would be. But if the Saudi authorities placate the public and offer shares of the company to the locals at discounted prices, they would likely be unable to achieve the coveted US$2-trillion value of the company.

If a value close to US$2 trillion is unlikely to be achieved, the share sale could be delayed, a Saudi banker told Reuters last week.

But if the Saudis proceed with the IPO, they may see Aramco’s value not exceeding a combined Apple-Google-Microsoft, but more like equal to one Facebook, or one Amazon.

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • JACK MA on February 28 2017 said:
    Translation begins:

    The IMF and the Elites are stealing Saudi State Oil Assets.

    Same as Venezuela when they default in 2 months.

    When the right people own the assets and get themselves on the receiving end of the revenue streams, oil will magically rise. Until then paper oil and fake supply numbers will keep oil down and these states on the edge of bankruptcy and to the point of surrendering sovereignty for loans.

    Translation complete:

    Simple Simon logic.
  • Bonaventure Stephen Gomes on March 01 2017 said:
    Comparing Saudi Aramco's proposed IPO valuation with the likes of Google, Facebook, Microsoft, Apple, Alibaba or Amazon is like comparing apples with oranges. Even comparisons with Exxon-Mobil, Rosneft, and other oil majors is a disconnect. Bear in mind, Saudi Aramco is a National Oil Company (NOC), and they are beholden to their respective governments. Much of Saudi Aramco's vision, and mission, is for the benevolence of the Kingdom of Saudi Arabia (Kingdom), their royalty, and their peoples. Saudi Aramco's upstream operations are confined within the Kingdom, unlike international oil majors that are engaged across the globe. Moreover, its upstream operations are fully supported by major international oil & gas service companies, including, but not limited to, Halliburton, Weatherford, and Schlumberger. Saudi Aramco has very little success in its downstream operations. As in its recent investment in a joint venture refinery in Malaysia, Saudi Aramco's contributions are limited to investing billions of petrodollars and raw materials in form of crude oil & gas. Its joint ventures in downstream have failed in Greece, Philippines and the USA. It is holding on to its downstream operations in China and South Korea. Having said that, once Saudi Aramco writes out the checks to the Kingdom, its royalty and its peoples, there is very little left as dividends for its investors who may come on board following an IPO. Of course, big Wall Street banks are latching on to the Saudi Aramco's IPO for their big share of the lucrative fees they will earn, while White & Case (their de facto legal counsel) will provide the legal advice. Strangely, Saudi Aramco has never been able to build an in-house team of legal expertise, leave alone, building an in-house of oil & gas expertise after 75+ years in existence. For its chemical stream, Saudi Aramco chose to partner with Dow Chemicals. From drilling a hole in the wall to drilling a hole in the ground, all services are contracted. Saudi Aramco is a bloated company with 57,000+ employees (85% Saudis). It can function with less than that. Nepotism has seeped in. Discrimination pervades. Payroll is determined by the color of your passport. A US national from a mofussil college in the USA will earn several times more than a Saudi national with a degree from Yale, MIT, Harvard or Columbia. Investors in the IPO must step up transparency from Saudi Aramco, ensure accountability of revenues and disbursements, and better negotiated deals with contracting companies. Valuation based on oil reserves under the ground or seas is like a sunk investment as in the bibilical tale, an investor buried in the ground the talent from his master for fear of losing it all.
  • Eko Santoso on March 01 2017 said:
    Best time to invest in stock market is when things are on odd side, And it’s not easy how to pick stocks...... By reviewing stock prices from the stock market history of the company and examining its analysts ratings can give an investment picture with updated information of stock which helps investors to make investing decision !

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