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Oil’s $1 Trillion Question


How much is Saudi Aramco, the world’s largest energy company, actually worth?

If it wasn’t a sales pitch, it really sounded like one. “Aramco is by far the lowest-cost producer,” said Khalid al-Falih, the Saudi oil minister, at the Future Investment Initiative in Riyadh. The October gathering, dubbed “Davos in the desert,” brought together a who’s who of business and finance, including the bosses of Blackstone Group LP and Credit Suisse Group AG. Al-Falih was talking up Saudi Arabian Oil Co., also known as Aramco, the state-owned oil company the kingdom is planning to sell shares of.

Aramco is the world’s largest energy company. With a monopoly on exploiting a good quarter of the planet’s oil reserves, it pumps more crude than Exxon Mobil, Chevron, and Royal Dutch Shell combined. Regardless of the rise of electric vehicles and the fight against climate change, “Saudi Aramco is going to be the supplier of last resort,” al-Falih said. “I am certain the last barrel that gets produced globally is going to be here in Saudi Arabia.”

It’s a hugely valuable business—the question is, just how huge? The Saudis say the company is worth at least $2 trillion. Analysts question that figure, and oil executives, speaking privately, say that something closer to $1 trillion sounds about right. To put that in context, the valuation gap is larger than the total value of Apple Inc., the world’s most valuable public company, at about $870 billion.

Whatever the final valuation, Aramco’s initial public offering is likely to be the biggest in history, even though it’s selling only a sliver of itself. If it floats a 5 percent stake, it could snag at least $50 billion, twice the record set by Alibaba Group Holding Ltd. in 2014. Saudi officials say the sale is “on track” for 2018, but that calendar looks tight.

The problem isn’t Aramco, but the Saudi government—or, more precisely, the young crown prince, Mohammed bin Salman, who controls most of the levers of political, security, and economic power in the kingdom. For months he’s delayed the decision about where to list Aramco’s shares beyond the local Riyadh stock market, known as Tadawul.

On the table are three main candidates: New York, London, and Hong Kong. Each has advantages and problems. New York offers the biggest pool of money and potentially the highest valuation, but listing there could also leave it more exposed to litigation in the U.S. London is more friendly legally, but it’s unclear that British regulators would allow the IPO in its current form. Hong Kong offers few regulatory obstacles, but its smaller capital pool means a lower valuation, too.

The indecision about where to place the international portion of the IPO will have a cascade effect. If Aramco ultimately goes to New York, it will need to present its balance sheet under the U.S. accounting system, which is different from the one used by Saudis and Europeans. Accountants and auditors can shift numbers around to comply with American rules, but that will take time.

Recently, people familiar with the situation have said the international portion of the IPO may be delayed until at least 2019. Saudi officials have hedged their answers to questions about timing, making a distinction between the preparatory work, which they said would be completed on schedule, and the decision to sell the shares. When asked if both the local and international pieces of the IPO would happen in 2018, Aramco Chief Executive Officer Amin Nasser gave a guarded answer. “The shareholder will make the decision regarding the venues,” he said. The shareholder, of course, is the government.

The Aramco IPO is the cornerstone of a much wider Saudi program to retool the economy and make it less dependent on oil. Professor Paul Stevens, a distinguished fellow specializing in energy at Chatham House, a London think tank, says the reputation of the crown prince himself is on the line. “Clearly, there are many serious problems with Saudi Aramco’s privatization,” he says. How the kingdom resolves them could mean a difference of tens of billions of dollars when the world’s investors are finally able to put a price on the company’s shares.


4 Comments on "Oil’s $1 Trillion Question"

  1. rockman on Fri, 3rd Nov 2017 3:20 pm 

    What is Aramco worth? A meaningless question in and of itself. Now a more meaningful question would be: what would someone pay to buy 100% of the company? But given that at the moment Aramco pays 85% of its revenue to the Saudi govt in taxes not nearly as much as many are speculating. But let’s say the KSA reduces the tax rate to 50% as they have proposed doing prior to the IPO. And let’s say a reasonable sales price would be $X. But what if someone did pay $X to buy 100% of Aramco and then the Saudi govt raises the tax rate to 99%? Like any sovereign nation the KSA is free to change its corporate tax code anytime it decides to…just like the US govt is attempting to right now.

    Sorta makes one question if $X is a good sales price…or if any price makes sense. But they aren’t talking about selling 100% of Aramco. In fact they aren’t even talking about selling 5% of Aramco. No, they really aren’t. What they are proposing is to make Aramco a “publicly owned” corporation by issuing stock and offering 5% of it for sale. Of course, calling it a publicly owned corporation is absurd given the Saudi govt will own 95% of the stock.

    But none the less here’s the next important question: if someone purchases X shares of the newly issued Aramco stock for, let’s say, $10 million, how much revenue would they receive yearly? Right now the answer would be $0 to whatever the dividend yield would be. And given the Saudi govt, which would control the board of directors, hasn’t offered any hints the answer today is: WE DON’T KNOW.

    So the next question: how much would that buyer of $10 million worth of IPO Aramco stock be able to sell it for, let’s say, a year later? That, of course, would depend on what the market valued it at. If it’s paying $0 dividend the first year I doubt that stock would sell for $10 million. But since we don’t know what the dividend yield might the answer is the same: WE DON’T KNOW.

    So for the moment the answer to how much the Saudi govt will receive for selling 5% of the stock in the newly formed public corporation called Aramco is simple: it can’t be calculated or even estimated. Of course that doesn’t everyone and their aren’t free to speculate all they want.

    Which is why we’ll periodically see article like this one wasting space on this website. LOL.

  2. makati1 on Fri, 3rd Nov 2017 8:06 pm 

    The world is full of liars these days and the oily industry is one of the largest concentrations along with economists and governments.

    No one knows how much oil is left that is truly recoverable at a usable EROEI. No one. It is why i rarely comment on oily topics. Just dust blowing in the wind. All signs point to its soon demise. Are YOU prepared?

  3. Sissyfuss on Sat, 4th Nov 2017 9:40 am 

    So what you’re basically saying Rock is that you are ready to dive in with both feet and your MasterCard into this giant lake of oil IPO. Or are you getting a piece of the action from the camel humpers?

  4. rockman on Sat, 4th Nov 2017 11:47 am 

    Sissy – Too oldvto play the equities. But if I did I might play a short on Aramco at one point in time. Like just before the market realizes the Saudi govt isn’t going to give up revenue it isn’t LEGALLY required to.

    But as I postulated earlier I suspect it won’t structured as a pure IPO but have some sort of structure more like a bond with a guaranteed interest rate. In effect the KSA just borrowing some of Aramco’s future revenue.

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