Friday 24 November 2017

Too big to value: why Aramco is in a league of its own

Using a conservative valuation of roughly $10 per barrel, Aramco could be worth more than $2.5tn.
Using a conservative valuation of roughly $10 per barrel, Aramco could be worth more than $2.5tn.

Javier Blas

By any measure, Saudi Arabian Oil Co is in a league of its own. Take its oil reserves, roughly 260 billion barrels, nearly 10 times those of the global ultra-major Exxon Mobil Corp. Or its daily production, 10 million barrels, more than the domestic output of every US oil company combined. Which is why the mere suggestion that this state-owned oil giant might go public seems so outlandish.

Would the Kingdom of Oil really place its crown jewel in the hands of fickle investors?

The answer is maybe. On Friday, Saudi Aramco confirmed that it was studying options to allow "broad public participation in its equity through the listing in the capital markets" of either the whole group or a subsidiary.

What is that worth? Based simply on its oil reserves and using a conservative valuation of roughly $10 per barrel, Aramco could be worth more than $2.5tn (€2.3tn).

And yet stock market investors rarely value state-owned oil companies as dispassionately as the numbers suggest, or as government officials might hope.

Should Aramco go public, it might actually fetch as little as $100bn, based on valuations applied to similar state-owned groups.

Of all the major state-owned oil groups, only Chinese companies, such as PetroChina, have large market capitalisations, running into the hundreds of billions of dollars.

The reasons? One is political risk, real or perceived. Investors often worry that governments will put their interests ahead of shareholders. Others are a lack of transparency and, in some cases, corruption.

For investors, a smaller chunk of Aramco could be easier to value and the kingdom has already some experience. In January 2008, it listed a venture called Rabigh Refining and Petrochemical, with Aramco retaining a 37.5pc stake, Sumitomo Chemical another 37.5pc and the rest sold into the local market. Rabigh, which processes about 400,000 barrels a day, is today worth about $2.4bn (€2.2bn).

Yet Rabigh is also an example of the potential pitfalls. As news hit on Thursday of the possible IPO for Aramco, Rabigh shares fell to an all-time low, leaving them down 51pc since the IPO.

That shows that while Aramco may be in a league of its own, it still faces the same challenge as everyone else in the oil business: the lowest crude prices in 12 years.

Sunday Indo Business

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