Saudi Aramco is unlikely to achieve the $2tn valuation sought after by Saudi officials ahead of its planned stock market listing despite the state energy giant’s huge profits and cash flows.
The financial community and oil analysts have long been sceptical of the ambitious valuation targets of the kingdom’s crown prince Mohammed bin Salman, but now new financial information adds weight to the idea that Saudi Arabia is unlikely to get there.
For decades financial information has been kept a closely guarded state secret. But now it has emerged that the world’s largest oil producer earned $33.8bn in the first half of 2017, according to Bloomberg that cited company accounts it had seen.
The reported financials when plugged into a Financial Times model generate a valuation of $1.1tn using estimates for future oil prices around $64 a barrel and $1.5tn assuming a significantly higher level of $93 a barrel.
Valuing Saudi Aramco depends on a number of factors involving costs and oil production, but most important is the crude price. Only with oil rising to around $120 a barrel by 2023 can a $2tn valuation easily be achieved, according to the FT model.
Prince Mohammed is privatising state assets as part of his ambitious economic reform programme with proceeds to be ploughed into non-oil sectors. As part of this he seeks to raise $100bn through a 5 per cent sale of Saudi Aramco, which would be the biggest ever listing.
“The figures, though good, still imply a valuation that falls short of what Saudi officials are after,” said Robin Mills, at Dubai-based energy consultancy Qamar Energy. “If they are still hung up on the $2tn number, it’s never going to work.”
The kingdom’s highest authorities have worked with Saudi Aramco and its IPO advisers to untangle its finances from those of the state, shifting certain liabilities from the company’s accounts to that of the government and finding other workarounds to improve its valuation.
The accounts, prepared to an IFRS standard, show the company has little debt and has very low production costs.
Saudi Aramco reported total borrowings of $20.2bn in the first six months of 2017, which was offset by cash and cash equivalents of $19bn.
It reported capital expenditures of $14.7bn in the first half of 2017 and spent $7.9bn on production and manufacturing costs.
Saudi Aramco paid the Saudi government $18.5bn of royalties on revenues and $39.9bn in income taxes over the period. It also paid a dividend of $13bn.
Calculations by Bloomberg showed Saudi Aramco generated adjusted cash flow from operations of $52.1bn in the first half of last year.
However, this takes into account $21.4bn owed to the company from the government. It is unclear what this relates to, but historically the company has undertaken projects on behalf of the government — from schools to stadiums — and has borne the cost of energy subsidies for the kingdom. The FT model takes into account this optimistic cash flow number. But if the owed funds figure was taken out, then a valuation below $1tn would be more likely.
“This not a regular oil company. It is a source of Saudi wealth. The kingdom wants to have its cake and eat it too. It wants to go public and be treated as a normal entity, but they also need to use it as a cash cow,” said Aswath Damodaran, a finance professor at New York University.
“There is no way it gets to $2tn. It was a fantasy from the beginning.”
Although the kingdom has confirmed a listing on the domestic Tadawul exchange, it is still considering whether to also list on a foreign exchange — such as in London, New York or Hong Kong — or opt for a private sale.
It had originally aimed for an offering this year, but foreign officials have been briefed that a delay into 2019 at the earliest is more likely.
When asked to comment on the numbers reported by Bloomberg, the company said: “This is inaccurate, Saudi Aramco does not comment on speculation regarding its financial performance and fiscal regime.”
The Commodities Note is an online commentary on the industry from the Financial Times