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Page added on March 11, 2017
Could Saudi Arabia Cancel Aramco’s IPO?
As oil prices decline, the lead underwriters of Saudi Aramco’s initial public offering (IPO) must be wondering if the Saudi government will change its mind about privatizing the company in 2018. U.S. crude fell again on Thursday, settling at $49.28 per barrel, lowest close since November. Fitch Ratings revised their WTI crude oil price forecasts lower by $2.50 per barrel this month to average $52.50 in 2018. The company also has a “stress case” price of $40 per barrel in 2018. (For more see: Is Oil Forever Stuck at $40 to $60 Per Barrel?)
The Saudi government estimates Aramco’s value at approximately $2 trillion using a formula of 261-266 billion barrels of oil reserves multiplied by $8 per barrel. Others such as Wood MacKenzie, an independent oil consultant, estimate the value closer to $400 billion using an undisclosed valuation method. The problem with the Saudi’s valuation method is that it doesn’t work for other oil companies around the world. Bloomberg analysts pointed out that if the same measure was applied to Russia’s largest state-owned oil company Rosneft (MCX:ROSN), it would be valued more than 4 times higher than its current market value, while ExxonMobil (XOM) would be worth half as much as its current market value.
Saudi announced its intention to IPO Aramco in early 2016 when oil prices were at their lowest level since the 2009 financial crisis. The drop in oil prices caused the country’s public finances to come under severe strain. At the time, this caused Standard & Poor’s to predict the country’s debt would reach $174.3 billion by 2018. Selling a 5% stake in Aramco would have netted the country $100 billion using the $2 trillion valuation figure, greatly helping to plug the budget gap. If the number is closer to Wood MacKenzie’s estimates, the government would only come up with about $20 billion.
But the Saudis are probably not willing to sell Aramco at anything less than a high price. Although no exact figure has ever been reported, it seems reasonable to assume that the government may have second thoughts about selling off such a prized asset if oil falls below $40 per barrel on a sustained basis. The logic being that enthusiasm for the IPO grew as oil trended toward $60 per barrel. If the trend is now going the other way, banks may find that the Saudi government is willing to wait for a higher oil price and better time to sell.
7 Comments on "Could Saudi Arabia Cancel Aramco’s IPO?"
Cloggie on Sat, 11th Mar 2017 8:47 am
Translation: nobody is interested in KSA’s bazaar deal that is four times overpriced.
Oil is out as everybody wants to “save the planet before it is too late” and everybody wants to be a “good green guy”.
Fortunately if the KSA state fails, there is always a fallback scenario if everything goes wrong:
http://tinyurl.com/jpqw5jh
Midnight Oil on Sat, 11th Mar 2017 9:25 am
If the Saudi Kingdom fails can’t wait until El Cheeto Trumpet blows his horn with a thumbs up on the shores of Mecca …Hear him now..
“Another fine mess Obammie left me to straighten out!”
rockman on Sat, 11th Mar 2017 12:59 pm
Cloggie – “…everybody wants to “save the planet before it is too late” and everybody wants to be a “good green guy”. I would rephrase that statement: “… almost everybody wants to give the appearance they want to save the planet before it is too late and be a good green guy”. The proof is that very little to nothing of significance has been done by the overwhelming majority of the consumers. In fact for every positive efforts we can find equally negative actions around the world. Such as the obvious fact that global fossil fuel consumption has reached historical record high levels in the last couple of years. That doesn’t exactly support the assertion that “oil is out”.
Same situation as always: there’s what people say what they should and want to do and then there’s what they actually do.
Nony on Sat, 11th Mar 2017 1:19 pm
I don’t think a $5 (10%) drop in the price of oil would be enough to change their strategy. For that matter it is not clear to me if low prices drive the sale more (need the money more) or if high prices do (get more for the asset).
zia urahman on Sun, 12th Mar 2017 8:10 am
Muja driving ka Vesa cha hea
Cloggie on Sun, 12th Mar 2017 8:55 am
@rockman – that is why I put these remarks between quotation marks.
The increased levels of fossil fuel consumption has to do with economic growth of “emerging economies”. In Europe it is actually declining and not because the economy there is collapsing.
When I said “oil is out” I was merely referring to the image of oil for the people with enough money in their pocket to buy Aramco, not the global consumption level.
Truth Has A Liberal Bias on Mon, 13th Mar 2017 12:50 am
Saudi Aramco pays 20% royalties on its revenue plus 85% income tax on profits.
Shell, Total, Chevron and Exxon produces about 12 million barrels a day and combined are worth less than a trillion. Saudi Aramco produces less oil and some dipshit Saudi Prince thinks it’s worth 2 trillion. The Saudis are fucking idiots. Somebody should punch that retard Prince in the cock. I can’t wait until I see him on CNN hanging from a tank barrel.