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The Truth About Aramco’s $2 Trillion Valuation


Two trillion dollars: this was the price tag Riyadh put on the jewel in its crown, state oil and gas giant Aramco. This is how much the company was worth, officials said, if you multiplied its proven reserves by a factor of US$8, which is the figure used to value oil and gas reserves.

There were doubts about that valuation from the start, and now these are deepening as the company crawls closer to the initial public offering. For starters Aramco’s opacity was very likely to make potential investors suspicious.

Aramco has never published financial reports. Although there were assurances that it will start doing so ahead of the IPO, to date the latest entry on Aramco’s Corporate Reports page is from July 20 last year, and includes production figures for 2016. Last year, sources had told Reuters the company was planning to start publishing financial reports early this year, but this has not happened yet.

Leaving these concerns aside, there is the bigger problem of the valuation methodology itself. In a blunt but very informative story for Bloomberg Gadfly, Liam Denning suggests that Aramco may need crude oil at US$80 a barrel to get the US$2-trillion valuation it claims it has. That’s in addition to making several wild assumptions along the way.

The oil world today is different from what it was just five years ago. The oil price collapse taught oil producers to be more economical and to pick their projects more carefully to keep cash flows coming in and sharing them with shareholders. Yes, they had to sell additional stock, and some suspended dividends, but the lesson was learned, and the moment prices started perking up, dividends returned, and stock was bought back.

Yields are what investors want when they consider whether to invest in a company, Denning says. They don’t care about proven reserves and production costs as such. Instead, they care about how these can turn into dividends. It’s as simple as that, but this is where it stops being simple.

The average free cash flow yield of the global oil supermajors is between 5 and 7 percent. Russia’s Rosneft, while not a supermajor per se, sports the highest one, at 12.950 percent, while Exxon has the lowest at 5.194 percent. Based on these actual figures, Denning makes an entertaining set of calculations involving major assumptions about the price of oil, Aramco’s production and costs, and profit margins.

The result is that to lure investors with a 5-percent cash flow yield (the minimum that would make it competitive), Aramco needs oil to sell for US$80 a barrel. This is the only scenario where it can be valued at US$2 trillion: the only scenario out of 35, all based on favorable assumptions.

Oil is not going up to US$80 anytime soon unless something cataclysmic happens. Denning is also generously—and deliberately—not factoring in the inherent regional risk in the Middle East that is likely to act as a deterrent to potential investors. The publicity machine around the IPO has begun to creak already. Recently all those suspecting Aramco won’t make its own deadline for the IPO had to pleasure to be proved right: Saudi officials said it will be delayed until next year.

Now, Bloomberg is reporting that U.S. investors have misgivings about the IPO. Citing sources wishing to remain unnamed, Bloomberg had this to say: Among the issues raised were the $2 trillion valuation Saudi Arabia wants for the world’s largest oil producer, the scale of dividends Aramco’s prepared to pay and the impact of the shale boom on oil prices over the next few years.

Investors want cash, not massive reserves. Maybe this would prove a lesson Aramco has to learn the hard way.

By Irina Slav for

8 Comments on "The Truth About Aramco’s $2 Trillion Valuation"

  1. Cloggie on Sat, 17th Mar 2018 10:44 am 

    KSA is scared to death for peak oil demand and now tries to sell their sludge before it becomes a stranded asset, asking prices as if we are dealing in a middle eastern bazaar, which of course is what it is, asking an initial price 10 times too high.

    There is a new source of energy at the horizon, yes that golden ball you better not look straight into.

  2. MASTERMIND on Sat, 17th Mar 2018 11:10 am 


    Nobody is scare of peak demand. If EV’S knock off some oil demand the price of oil will go down. And people who use oil will buy more of it and the demand will go right back up! Jevons paradox you uneducated white trash!

  3. Plantagenet on Sat, 17th Mar 2018 11:10 am 

    The Saudis are very smart businessmen. There’s only one reason for KSA to put their oil biz on sale—-KSA made the calculation that they could make more money selling shares in their oil biz then they could selling the remaining oil.


  4. BobInget on Sat, 17th Mar 2018 12:35 pm 

    Saudis can’t list in USA cause KSA can’t (or won’t)
    permit transparency.

    China OTOH, won’t ask rude questions.

    China plans to launch crude oil futures on March 26: securities regulator.

    Fewer then 10 days.

  5. rockman on Sat, 17th Mar 2018 12:42 pm 

    Did I miss it: been watching and haven’t even see a hint as to what the Aramco dividend yield might be. Or even if it will pay any. And even if they advertise an initial yield the board of directors (all elected by the Saudi govt) can reduce or eliminate the dividends at any time it chooses. The 5% owners will have no say in how the company operates.

    As far as the “free cash flow” bullshit they seem to have forgotten the Saudi govt currently taxes Aramco at an 85% rate. The govt has promised to reduce the rate to 50% when the IPO is issued. Of course, it will be free to increase it to any rate it chooses in the future.

    But it really doesn’t matter how Aramco and the Saudi govt say the revenue is distributed since the books will not be open for public review. Which is why it’s unlikely the IPO will be issued on an US or UK stock exchange because of their regulatory requirements. The Singapore exchange, with less stringent reporting regs is being discussed. As is the Tadawul, the Saudi Arabian stock exchange.

    Yep, that should be very transparent. LOL.

    P – The Saudi govt IS NOT selling 1 bbl of its oil reserves. It will be selling 5% of a company, Aramco, that has a production sharing agreement with the Saudi govt. Aramco does not own any of the oil reserves in Saudi Arabia. It only owns a portion of the oil after it is produced. Essentially the same as every production sharing in the world. And currently the Saudi govt takes 85% of that revenue as income taxes. The remaining 15% of the revenue is what Aramco gets to spend on operations (drilling, producing, seismic acquisition) in Saudi Arabia as well as all overhead.

  6. Boat on Sat, 17th Mar 2018 4:50 pm 

    If EV’s cause a glut producers will just curtail production to get the prices jacked back up. There will be a smaller market. No Jevons paradox.

  7. MASTERMIND on Sat, 17th Mar 2018 5:10 pm 


    They wont need to curtail production because the demand will soar when prices come down. Jevons paradox you dumb ignorant fuck!

  8. joe on Sun, 18th Mar 2018 8:27 am 

    5% of shit is shit, doesn’t matter if that company was worth a quadrillion dollars, it has only one revenue stream in an geopolitical deathzone. But I’m sure there are some idiots who will punt their entire pension on this. 5%! Can’t imagine the Saudi King (mbs) really thinking too much about what the 5% people think about what he will do with his 95%. If there is one thing an Arab tribal Lord like the Saudi ‘King’ likes to do its rob from the Kuffar. What better way to do it than with an IPO to make the greedy fools hand over billions.

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