The long view: What is Saudi Aramco really worth?

Saudi Aramco’s IPO was introduced as a central element of Vision 2030, the ambitious economic diversification strategy unveiled by Prince Mohammed bin Salman (MBS) in January 2016, when oil prices reached a historic low of $29 per barrel. The prospects suddenly darkened for Saudi Arabia and it was necessary to respond quickly. The crown prince’s goal was to float 5% of the world’s largest national oil company, and by the way the sixth largest company by volume in 2019, according to the Fortune Global 500 ranking. By selling up to 5% of Saudi Aramco’s shares, based on a sharp valuation of $2 trillion, the Crown Prince is expected to renew Saudi state coffers by up to $100 billion, provide them with much-needed financial resources and allow them to jump to start their investments in line with vision 20 30.

Since the IPO announcement, the debate has focused heavily on the market valuation of the oil giant. Some analysts pointed to the discrepancies between the two trillion figures quoted by Mohammed bin Salman and the much lower estimates it derived from the company’s operations, especially when compared to its international counterparts. An equally controversial issue, which hampered the early IPO process, is the potential gap between the company’s objectives of maximizing value and government energy policy, which, in the Case of Saudi Arabia, overlap swells considerably with its foreign policy and its foreign policy development policy. overall economic. In fact, the kingdom has the second largest proven oil reserves in the world after Venezuela. It is the world’s largest exporter of crude oil with a market share of 17%. The Saudi government determines how much oil can be produced and exported from the Kingdom each year.

Since 1960, Saudi Arabia has been linked to its commitments as a member and de facto leader of OPEC, one of its five founding members. More recently, it has fully committed itself to the implementation of the OPEC+ agreement concluded in Algiers in December 2016 between OPEC and other major oil producers such as Russia. In fact, the Algiers agreement could be seen as a Saudi-Russian “friendly understanding.” She was deported at the end of 2018, testifying to her success and market stability. In the long run, there is a growing likelihood that this Saudi-Russian tactical rapprochement will become a long-term strategic partnership, which could have long-term implications for global oil governance, as i have mentioned several times since 2016.

In this context, in the absence of detailed financial and non-financial information, it was difficult to draw sound and unbiased conclusions about Saudi Aramco’s strategy and its potential market value. The first important information elements were revealed in April 2019, following the issuance of $12 billion in international debt to finance the $69 billion acquisition of SABIC, saudi arabia’s leading chemical company. The figures revealed that Saudi Aramco made a net profit of $111.1 billion in 2018, more than any other company in the world. As reported by the Financial Times, Apple’s profit was five times higher than that of Royal Dutch Shell during the same year.

Based on these figures and based on a profit multiplier of 13, calculated as an average of several major global oil companies (ExxonMobil, Chevron, Royal Dutch Shell, ENI, BP and Total), IG analysts valued Saudi Aramco in a range of $1.1 trillion to $1.45 trillion. The lower part of the range is equivalent to a discount of 17 per cent, which takes into account the geopolitical risk premium and state control over the company. On the other hand, thanks to its low level of indebtedness – with a long-term debt of $35 billion after taking into account the issuance of the above debt mentioned in $12 billion – which translates into a 10% guidance ratio, Saudi Aramco can make multiple profits of 15, much closer to that offered by ExxonMobil Chevron, from Shell and BP, whose petty multiplier of 10 leverage reflects a much higher debt, is in the range of 30% to 40%. Therefore, at best, Saudi Aramco will be valued at $1.7 trillion under current oil market conditions, before any haircut related to political and geopolitical risk premiums is applied. It is clear that if oil prices fall, as a result of darker global growth prospects and related oil demand, the valuation will have to be revised downwards accordingly.

Against this background, the acquisition of SABIC had several objectives. On the one hand, the Public Investment Fund has allowed its cash holdings to be increased immediately and its investment strategy, both domestically and externally, in line with the initial targets of Vision 2030. On the other hand, its aim was to increase Saudi Aramco’s attractiveness to potential investors, by offering it as an integrated energy company, with a leading position in the upstream sector and a strong position in the downstream sector, including in the high value of derivatives such as composites and specialized chemicals. At the same time, the success of Saudi Aramco’s related issuance of the company’s debt was intended to reassure investors and raise their appetite for public offering itself, taking advantage of the company’s low level of indebtedness and the implicit guarantee it enjoys from the state.

In order to facilitate the IPO and clarify the responsibilities of all players in the oil sector, the Saudi government in 2017 introduced several important amendments to the country’s hydrocarbon law. As in many other countries in the world, Saudi Arabia’s oil reserves are exclusively state-owned. However, until 2017, Saudi Aramco has enjoyed an exclusive permanent concession to exploit these fossil resources. As part of a comprehensive overhaul, the permanent concession was lifted for an exclusive 40-year concession over the period 2017-2057, completed with a 20-year extension period until 2077. Saudi Aramco’s profit tax rate has been reduced from 80% to 50%, and a more progressive royalty system has been enacted, at a marginal rate of 20% when oil prices are below $70 per barrel, 40% between $70 and $100, and 80% above $100.

In August 2019, in addition to the financial statements disclosed for the previous financial years (2016, 2017, 2018), the Group published its semi-annual financial results for the first time in its history. These figures reveal a dividend of $46.39 billion to the state in the first half of 2019. To enhance the company’s valuation, Saudi Aramco announced that it would pay a total profit of $75 billion in 2020, and that for the years 2000-2024, profits paid to minority investors would be calculated out of $75. billion, even if the company has to reduce the total profits paid to the state, if the actual profits are lower than expected. Exxon’s major oil companies to BP currently offer a dividend – the percentage of profits the company pays in relation to market value – ranging from 4% to 6%.  If Saudi Taramo applies the same dividend yield, its potential valuation would be between $1.25 trillion and $1.87 trillion. However, this does not take into account the risk premium associated with “this systematic national political will”. In light of the latter, foreign investors are likely to expect higher dividends to hold Aramco shares than Exxon or BP.

Doubts about the timing and importance of Aramco’s IPO have resurfaced several times since Mohammed bin Salman’s announcement in January 2016, even within the stifling microcosm of Saudi policymakers and technocrats. The persistence of these uncertainties and the negative resistance to the IPO may explain the sudden shame of former Energy Minister Khaled al-Falih earlier this year. He was deprived of all his responsibilities, including his position as president of Saudi Aramco, which fell to Yasser Al-Rumaian, a 49-year-old investment banker appointed by Mohammed bin Salman in 2015 to head the Public Investment Fund. In fact, what seems like an irregular step is part of a well-thought-out strategy.

With the appointment of Al-Rumayan to head the Board of Directors of Saudi Aramco, the Palestinian Finance Corporation, which until 2016 was a back-up, has become a central player in the Saudi economy. This cannot be said of the Saudi Arabian Monetary Agency, which, although managing the country’s foreign exchange reserves, plays a secondary role because of the fixed Saudi riyal’s peg to the US dollar. In fact, the Energy Minister has always been considered the highest official in Saudi economic policy, through his grip on Saudi Aramco, the kingdom’s cash cow and the “delivery unit” of all major state-paid projects. This is no longer the case. From now on, all economic power is concentrated in the hands of Mohammed bin Salman and his close advisers, including Al-Rumaian, the most visible figure. This strategic shift has largely gone unnoticed by observers who are not familiar with the opaque power struggles within the Saudi establishment. In order to give more consistency to this strategic shift, perhaps the Saudi Investment Fund should abandon some of its international exposure — particularly some of the questionable investments made alongside Japanese conglomerate SoftBank — and increase its support for Saudi Arabia by foreign companies and investors. Wishing to develop meaningful projects within the Kingdom. .

The Case of Khashoggi, named after a prominent Saudi journalist who was kidnapped and killed in October 2018 inside the Saudi consulate in Istanbul, damaged Mohammed bin Salman’s reputation as a progressive leader and reformist ideologues. For some time, this has diminished the interest of Western investors in the kingdom. A UN-backed report described the killing of Jamal Khashoggi as an extrajudicial execution. However, donald trump’s support for a crown prince has dispelled fears of a disruption in relations between these two historic allies. President Trump has rejected calls for sanctions against Saudi political leadership, citing instead the biased interests between the two countries. Mohammed bin Salman later admitted his political responsibility at the tragic end of Jamal Khashoggi, while denying that he had anything to do with it. In any case, the healthy attendance of the third edition of the Future Investment Initiative – a major investment forum called “Davos in the Desert”, held in Riyadh from 29 to 31 October 2019 – demonstrates that there is a return to “business as usual” on the p-art global investor community.

However, the most serious blow to the kingdom’s ambitions and its national oil company was the sudden coordinated attack on Saudi Aramco’s missile and drone installations in September 2019. Saudi and U.S. authorities attributed these attacks to Iran, directly or through proxy forces in Iraq and Yemen. So far, however, there has been no substantiated evidence to support these allegations. These attacks showed the weakness of the kingdom’s oil sector in the face of such malicious “hostilities.” It temporarily disrupted half of Saudi Aramco’s oil extraction and processing capacity, affecting oil production by up to 5 million barrels per day. However, on this occasion, the company proved to the world that it possesses well-honed crisis management capabilities. It was able to implement a contingency plan in record time, allowing it to respect its external contracts – especially Asian refineries that collectively absorb up to 50% of the Kingdom’s crude oil production and 70% of its oil exports. According to some industry experts, it will take months before the facilities affected by the attack are fully repaired. Meanwhile, Saudi Aramco will have to continue to take advantage of its oil reserves and import crude oil in the right quantity and quality to meet its obligations to its customers.

Officially, the Saudi authorities now plan to open the capital of Saudi Aramco in two phases: the first is expected to float from 1% to 2% of the capital on the national stock market, trading, followed by another float of 1% to 2% of its capital on board the Toyal Stock Exchange. Donald Trump said over and over again — and twitted! – He wanted the Saudis to choose New York as a major venue for international public offerings. But this could create inseparable legal problems, not only because of the transparency obligations involved, but because it could expose the company to the takeover of its assets, in relation to long-standing lawsuits against the Kingdom by some U.S. NGOs and associations. London will have almost the same kind of flaws. But there are other alternatives to floating, such as Tokyo and Singapore. At the same time, the Kingdom’s authorities and financial agents have been active in seeking sovereign wealth funds and other state-owned holdings in the Middle East and Asia-Pacific to contribute to the success of this high-risk IPO. These negotiations almost certainly go far beyond the financial issues involved in this transaction. They are political in nature and may involve major trade-offs and complex arrangements aimed at inter-State relations.

With regard to the first phase of the IPO, and beyond doubts about Saudi Aramco’s effective valuation, the IPO may falter due to the shrinking liquidity of the national stock market, trading, in the wake of the collapse in oil prices in 2014. Most of the adjustment to this shock has already been achieved and its main negative effects on the Saudi economy have been absorbed. However, according to the Imf, the Saudi Treasury will continue to record a fiscal deficit of between 5% and 6% of GDP in 2020-2024. Thus, the government can continue to acquire a lot of the excess liquidity available in the banking sector to meet its own financing needs, leading to a further increase in the cost of liquidity, in a context where Saudi interest rates were rising in conjunction with the United States Interest, following the monetary tightening initiated by the US Federal Reserve since January 2016.

To alleviate these problems and maintain an assessment of nearly $1.7 trillion in the early days of Saudi Aramco’s first appearance on the local stock exchange, Saudi authorities have tasked a group of international and national financial advisors to approach local investors. In a country where, at its discretion, the state can reap and break wealth, because of the Saudi economy’s dependence on public procurement and because of loopholes in the rule of law. High-return individuals (UHNW) are urged to be patriots and acquire shares of saudi aramco’s leading national oil company. The “Ritz case” remained in everyone’s mind. However, many local investors often own non-liquid assets, consisting of real estate assets and shares of unlisted companies. The recent stumble in the Saudi market can be explained by the liquidation of stock market portfolios by these investors, in anticipation of the expected “grand national gesture” expected.

In the long run, if Vision 2030 succeeds in diversifying the Saudi economy, the Saudi state will gradually become less dependent on the cash flow generated by Saudi Aramco, which still accounts for 60% of its financial revenue. This would reduce the risk premium related to possible confusion and conflicts of interest between the company and sovereign strategic priorities. This reassures investors, but there is another threat to them: the end of the oil era. In 2003, former Saudi Oil Minister Zaki Yamani summed up this threat through a more important scathing formula than ever before: “Not because we were so little stonethat the Stone Age is over, and the oil age should end before oil runs out. With global awareness of climate change and its dire consequences and the emergence of reliable alternatives to fossil fuels, Zaki Yamani may be right much earlier than he originally expected.

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