ARAMCO IPO IS WORTH $2 TRILLION?

Oil giant Saudi Aramco is going public in 2018 and the Kingdom announced a projected value of more than $2 trillion, a market value that could include Apple, Google parent Alphabet and Exxon. However how is the Kingdom coming to such a valuation?

Whatever analytic approach you take, it is difficult to agree. Industry executives and analysts do not see such a value. For instance, the London Telegraph reported that Wood Mackenzie Ltd. came up with a valuation below $500 Million based on oil reserves and cash flow projections using different tax scenarios. So, floating 5% of its capital would translate to about $25 Billion a fraction of the $100 billion Saudi Arabia is seeking.

Aramco has never divulged any financial statements and being a State-owned company can benefit from a preferred tax treatment to improve the valuation before the initial public offering. Be it, still reaching such a staggering valuation would be a first for all stock markets.

A profitable IPO is important to Saudi Arabia to replenish a sovereign wealth fund that suffered from the depreciated price of Oil for the past two years. It would generate enough investment income at home and abroad to dominate state revenue after 2030, an interesting twist after 100 years of domination of the State revenue.

The Saudi government has a lot to play with among emerging doubts. Taxation being the main aspect. Imagine Exxon not paying taxes….value would certainly be higher. However, after all this accounting “gimmick” Aramco valuation will ultimately be based on its ability to generate cash.

Aramco is sit on the 261 billion barrels of reserves Saudi Arabia has in oil fields like the onshore Ghawar and offshore Safaniya. Saudi reserves are the second-biggest worldwide after Venezuela.

Saudi oil would last about 75 years if pumped at the existing pace making it viable for decades even if global warming reduces our appetite for crude.

However, if we establish value of Oil company based on reserve potential Russian Rosneft market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil Corp., the world’s largest publicly traded energy producer, would be half of its current value and if something happens to its reserves value such as the 15% write off announced today valuation should be affected but today Exxon stock rose by 1%.

Exxon Mobil Corp. announced today a write off about 15% of its oil reserves from its books, much of it from Canadian oil sands that “would be too expensive to extract at predicted prices” Lowering reserves estimates is a rare move for Exxon but was expected for months as volatility in the barrel needs to be reflected in the numbers. Canadian reserves could never be produced until price goes back to the 2011 $100 a barrel that seems very far for the time being, U.S. regulations require companies to take oil reserves off their books if they are not profitable at existing prices.

There is still another solution to improve Aramco market capitalization: allowing the price of Crude to go up.

Saudi Arabia remains the leader of OPEC and has the possibility to continue to curve down the production. In Vienna, Saudi led the path in forcing a 1.3 Million barrel per day production cut but Saudis are still arbitrating the Texas competition in keeping the barrel under $55 a symbolic figure at which Texas and other shale producers are said to become profitable.

Will the Aramco valuation force The Kingdom to let the barrel climb to $60 or higher…?