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Page added on February 28, 2017

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

Business

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



18 Comments on "Cooking The Books? Saudi Aramco Could Be Overvalued By 500%"

  1. makati1 on Tue, 28th Feb 2017 6:40 am 

    Chaos (Lies)… everywhere.

    Nuff said.

  2. onlooker on Tue, 28th Feb 2017 7:14 am 

    Yes, they got “independent” US, British auditors. What a joke. It is is everyone’s interests to cook the books and to confirm that fuzzy math. They truly must think the general populace are fools.

  3. Midnight Oil on Tue, 28th Feb 2017 7:46 am 

    As Trumpet would say, “These people are SMART, Super SMART, very intelligent and nice”.
    So, we should ignore the rules, actually the new rule, is there are NO rules”.
    Translation…the same thing is going on in our own backyard as we write.

  4. paulo1 on Tue, 28th Feb 2017 7:55 am 

    Midnight

    Does it really matter when the investors (banks and hedge funds) will be bailed out by taxpayers?

  5. Cloggie on Tue, 28th Feb 2017 8:00 am 

    General camel jockey practice of launching an offer 5 times the real value. That’s what they do with figs on the vegetable market and that’s what they do with oil fields.

    It’s a “cultural thing” and as the SPLC has taught us: “all cultures are equal”. Any other opinion would be racist and we are all glad we are not like that.

  6. makati1 on Tue, 28th Feb 2017 8:20 am 

    paulo, I think, (bailouts) it will not happen. I see nothing but chaos when the SHTF this time. The numbers are too big. This is NOT 2007. It will be interesting to watch though.

  7. q on Tue, 28th Feb 2017 8:30 am 

    The audit was done in a few months with data provided by Saudi Arabia. But investors should believe it at least for charity reasons. IS need more funding and all members of Saudi royal family need to keep their lavish lifestyles.

  8. shortonoil on Tue, 28th Feb 2017 9:27 am 

    We have done calculations using the 5% sale of Aramco to investors that will generate $150 billion for the Saudis from the sale. That result implies that Aramco has 60 Gb of reserves available at present prices. This has yet to be confirmed by third party sources.

    http://www.thehillsgroup.org/

  9. rockman on Tue, 28th Feb 2017 10:08 am 

    Cloggie – “…practice of launching an offer 5 times the real value.” I Don:’t like being preachy but looks like I need to toss in a bit of reality. First, the value of any publicly traded oil company has nothing to do with its booked reserves. There are US pubcos with 1/1,000 of the reserves of ExxonMobil and their stock garners a higher share price. More important folks need to remember there are only two related reasons for someone to pay $X/share: expectations of eventually selling their stock for more the $X/share and the dividends.

    So whatever price the Aramco stock settles at (remember after the initial subscription price stocks often sell higher but not always) let’s say it’s $80/share. So who here would buy Aramco for $80/share, let alone more, if A) it paid no dividends (there’s never a guarantee of such from any pubco)? Aramco can retain all the revenue it pulls in. And it can distribute most of it as royalty payments to the govt (how it’s normally done for any company) and not $1 in dividends to the share holders.

    Or B) there’s no expectation of future increase in reserves. Remember ExxonMobil drills up NEW reserves as well as buys existing reserves. So when was the last time the KSA announced a NEW discovery or the purchase of producing reserves?

    Bottom line the concept of what an oil pubcos is worth has nothing to do with how much reserves are in the ground. And as shocking as it seems, has little to do with its income. If one does not expect Aramco to at least replace some (if not all) of the previous years production why would you buy the stock? One reason: to get the dividends. But if that’s your goal? And Aramco ($80/share) is yielding 2.5% dividend and not replacing its depleting reserve bases and XOM ($80/share) is yielding 4% and replacing some of its produced reserves?

    And XOM is monitored and regulated by the SEC and Aramco has no oversight…which company would you invest in? So again, whether the auditors numbers are accurate or not really isn’t that critical: reserves in the ground never have and never will be the basis for the “real value” of a pubco’s stock. Don’t believe that? Pull up any Wall Street analyst’s revue of any oil pubco and look at all the different metrics they offer: find many references to proved reserves in the ground? If you do it will be focused on changes in that metric and NOT the actual volume.

    And lastly remember a significant policy XOM has followed in the past to maintain/increase its share price: stock buy backs. XOM has spent tens of $BILLIONS of its revenue to stabilize shareholder value: given the KSA’s desperate need to support its population can you imagine it sending tens of $BILLIONS out of the country to foreign shareholders SOLELY FOR THEIR BENEFIT? Hell, they might like to see the stock price tank and then buy it back on the cheap.

  10. Dredd on Tue, 28th Feb 2017 10:35 am 

    1936: Texaco joins with Standard Oil of California (later Chevron), to found the Arab-American Oil Company [Aramco]” (Oil Company Histories).

  11. rockdoc123 on Tue, 28th Feb 2017 11:24 am 

    there has now been reserve audits by DeGolyer and MacNaughton and Gaffney Cline who would have had direct access to Aramcos production and drilling reoords. Given Aramco wants to list on at least one of London, Toronto and New York exchanges they are governed by the requirements there which are quite strict for reserve disclosure. Once listed Aramco will have to report quarterly and face penalties for false reporting like any other publicly traded company.

  12. rockman on Tue, 28th Feb 2017 12:07 pm 

    “… who would have had direct access to Aramcos production and drilling records…” Which, as pointed out before, the accuracy of which cannot be confirmed by anyone. Just as the accuracy of any future data won’t be confirmed by anyone. I can fabricate data on the field I’m currently redeveloping that the same auditors could assign 100 million bbls of PROVED FUTURE OIL PRODUCTION. And as long as the auditors don’t check the records at the TRRC they won’t discover I’m lying my ass off. LOL.

    And that isn’t a hypothetical: I’ve see this done twice by US companies. And once I caught a company try to sell a well producing almost no oil and yet showed me the OFFICIAL TRRC production report indicating it was producing 60 bopd: they were taking that oil from some the production of a good well in the field and attributing to the crappy one. And no auditor would have caught the deception. Fortunately the Rockman had been doing this long enough to know how to get very useful info by greasing that operator’s contract field guager. Also found out about an underground blowout in the field that destroyed the value of another reservoir in the field.

    Not saying Aramco lied to the auditors but the Rockman has never accepted 100% of the 3rd party audit numbers for any company/client I’ve worked for. I got paid to generate my own numbers. And even when all parties are being honest there’s always enough gray areas for numbers to vary. And sometimes significantly.

  13. rockman on Tue, 28th Feb 2017 12:42 pm 

    But again back to the “value” of a company’s stock based upon proved reserves in the ground as opposed to the “book value” of those reserves. Consider Chevron: July 2014 – $134/share. And then just 12 months later – $88/share. So who thinks Chevron had 33% less oil reserves in just 1 year? But that’s how the market viewed the company IF YOU THINK it set the value on those reserves.

    And then in Dec 2016 back to $118/share. Same question: did Chevron’s reserves increase 34% like its stock price? Or did the market set the company’s worth based upon completely unrelated metrics?

    So should we expect Aramco’s value to be determined by the number of bbls some auditor claims it has in the ground or will the market strike the price upon completely different metrics?

  14. rockdoc123 on Tue, 28th Feb 2017 1:01 pm 

    “… who would have had direct access to Aramcos production and drilling records…” Which, as pointed out before, the accuracy of which cannot be confirmed by anyone. Just as the accuracy of any future data won’t be confirmed by anyone. I can fabricate data on the field I’m currently redeveloping that the same auditors could assign 100 million bbls of PROVED FUTURE OIL PRODUCTION. And as long as the auditors don’t check the records at the TRRC they won’t discover I’m lying my ass off. LOL.”

    you are confusing private companies with publically traded companies. And you need to keep in mind that Aramco has every last bit of their information merged into huge finite element models for production analysis. They had a supercomputer running these simulations back when PC’s were in their infancy. Why would they put false data in there? It would screw up their models and make any output (which drives the billions of dollar of investment they have made to facilities) invalid. Suggesting they went and recreated a dummy multi-million cell model to fool the auditors is beyond conspiracy theory ridiculous.

  15. rockdoc123 on Tue, 28th Feb 2017 1:18 pm 

    One has to remember that this is an IPO offered on the top public markets. A prospectus will have to be issued by Aramco which will outline how they arrive at the valuation. Falsifying information is a serious crime either in NY, Toronto or London. There will be investment banks involved and probably the largest ones who have more to lose than gain by over valuing an IPO of this size. They will have to back up the valuation either from the companies calculated NPV (arrived at through the reserve audit plus and analysis of all assets and liabilities such as plants, pipelines and other facilities) or from a comparison with a company of similar size that the bank can draw direct analogies to. As well large stock exchanges such as NYSE and TSX often require a fairness opinion before they will approve the valuation of an initial listing. There have been many cases where stock exchanges have required companies seeking an IPO to adjust their price either up or down in accordance with the exchanges assessment.
    Also be aware that listing at a high price might raise more capital out of the gate but it also runs the risk of stock devaluation once it is out on the market trading, especially if there is a large float. Saudi Arabia is in this for the long haul so I suspect they will list at a price that is reasonable and not overvalued. The average investor will not get a chance to buy at the listing price as all of those shares will have been allocated to participating banks and financial institutes who will dole them out to their top clients. By the time the shares break on the open market the price will likely have risen considerably.

  16. Nony on Tue, 28th Feb 2017 1:43 pm 

    “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.”

    You should use the strip outlook for crude oil price when evaluating a company or project. It is the Vegas betting line. It is arbitrageable.

    Strip is basically flat right now. Mid 50s as far as the eye can see.

    Note this doesn’t mean we won’t hit 30 or 80. But it is the betting line. Using something else to evaluate a prospect is silly.

  17. Dooma on Tue, 28th Feb 2017 11:32 pm 

    Where can I find the contact details for these independent auditors? I need my house revalued? THEY ARE GOING TO TAKE MY THUMBS!

    Surely they have phones in Monaco? Where the auditors will be on their new private luxury yacht sniffing more coke than John Bonham.

  18. GregT on Tue, 28th Feb 2017 11:36 pm 

    @onlooker,

    “They truly must think the general populace are fools.”

    Think?

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