As Saudi Arabia’s deputy crown prince pushes his nation’s Vision 2030 economic overhaul and crows of the $2 trillion Saudi Aramco valuation (ahead of its potential IPO), WSJ reports that officials at the state-owned oil company are using internal value estimates to $1.3 to $1.5 trillion, calling bin Salman’s estimate “unrealistic and mind blowing.”
Since deputy crown prince Mohammed bin Salman announced the stock-offering plan and his $2 trillion estimate early last year, insiders and outsiders have questioned how he arrived at that number.
About two dozen employees have been working since last year to try and figure how to take Aramco public, and have been working with Western consultants to explore ways to restructure Aramco to maximize its value, say people familiar with the process. The team has determined several variables – or what some call “levers” – likely to affect the price investors will pay for shares of the world’s largest oil producer, according to internal documents reviewed by The Wall Street Journal and people familiar with the process.
But, as The Wall Street Journal reports, no matter how they pull those levers, which include the price of oil and Saudi tax policy, Aramco’s projected value tops out at about $1.5 trillion, these people say.
One such lever was a major tax reduction (but even then it didn’t add up to bin Salman’s $2 trillion guess…
The Saudi government last month said it is reducing Aramco’s tax rate to 50% from 85%, bringing its tax rate closer to the level of the world’s biggest oil companies such as Exxon Mobil and Royal Dutch Shell.
That move would result in higher dividends for potential shareholders, and it brought Aramco’s internal value estimates to $1.3 trillion to $1.5 trillion from about half a trillion dollars, say people involved in the process.
By selling up to 5% of shares in an initial public offering targeted for next year, the government plans to raise billions of dollars that it can use to invest in other industries as part of a plan to reduce its heavy dependence on oil. The valuation discrepancy raises new challenges for a deal that is already fraught with complexity and facing opposition within the ranks of the kingdom’s government bureaucracy, according to people familiar with the matter.
One Aramco official called the figure “unrealistic and mind blowing.”
Questions about Aramco’s valuation surfaced earlier this year when a report for potential investors prepared by oil-industry consultant Wood Mackenzie Ltd. put Aramco’s value at around $400 billion, according to a client who attended a private Wood Mackenzie briefing. Saudi government officials say Aramco’s high reserves and low costs should make the company attractive to investors.
“Our profitability is higher than others and the interest we have received so far is huge,” said one official who defended the $2 trillion number.
Some officials inside the company and in government have privately suggested reevaluating the listing, say people familiar with the matter, and perhaps reducing its size or delaying it. So far, Prince Mohammed and his staff seem unlikely to do so, say people familiar with the matter.
“This IPO will happen regardless of the valuation they may receive,” according to the government official who called the $2-trillion-dollar number “mind-blowing.”
rockman on Mon, 24th Apr 2017 9:28 pm
It seems some folks are to focused on the forest and aren’t looking at the individual trees. The neither the volume nor the value of the Saudi oil reserves are of no relevance to the value of Aramco. As just pointed out elsewhere those reserves DO NOT belong to ARAMCO…the belong to the Saudi govt. ARAMCO is a privately owned (by the Saudi govt) that has the right to produce and sell the Saudi oil. ARAMCO is responsible for 100% of all development costs and operations overhead. And the net revenue remaining has been heavily taxed. No official numbers are available since the are state secrets but some estimate that essentially ARAMCO has been netting $0. For instance I’ve looked at a number of annual reports for ARAMCO. Lots of numbers for the values of sales along with hundreds of $billion paid in salaries and to local Saudi companies. But no mention of taxes paid to the Saudi govt. More important: no mention of ARAMCO net income. But the analysts do note one fact: ARAMCO has no history of paying any dividends.
So it’s really a very simple reality: there are just 2 avenues to making money by owning a stock: dividends and selling it for more then you pay for it. Time will tell if the IPO will include a projection of a future dividend yield. Of course, any future dividend payments will be made at the discretion of the board of directors. A board that will obviously dominated by the majority shareholder…the Saudi govt.
So the question folks should be striving to ask IS NOT the value of the Saudi oil in the ground. Nor is it the NET REVENUE ARAMCO will receive by producing the oil belonging to the Saudi govt. It even the price of the shares offered in the IPO. The only important question: how much revenue will the owner of a share of ARAMCO receive? Of course the Saudi govt will own 95% of the stock. But it will also receive 100% of the tax it collects from ARAMCO in the future.
Kenz300 on Tue, 25th Apr 2017 5:48 pm
Cash out while you can.
Fossil fuels will become a liability in the future.
Amanda on Sat, 29th Jul 2017 5:57 pm
The hitch is not $ 500 Million but around 1.5 Trillion. The DCF Model created by someone is transparent for everyone to see and to learn that Saudis are bluffing everyone. Even with increased revenues, there is no way this company is worth more than $ 800 billion
https://www.perchingtree.com/saudi-aramco-pre-ipo-valuation-discounted-cashflow-model/