David Fickling: After the collapse of the weekend’s talks in Doha, oil markets are starting to have a distinctly 1986 feel to them. Read on
The Saudi government recently confirmed plans to sell a five per cent stake in its state oil company as part of a radical plan to shake up the kingdom’s stumbling economy through a $3 trillion sovereign fund.
The centrepiece of that fund will be the eye-watering valuation attached to Aramco, some $2 trillion-$2.5 trillion, paving the way for the largest stock market flotation in history.
The company contributes around 12 million barrels a day to the global market, roughly one in every nine barrels of the world’s oil supply.
It also maintains the world’s largest spare crude oil production capacity, which – in theory – could single-handedly stabilize the global oil market in times of supply disruption.
But putting a price tag on what is arguably the world’s most important company is a question global investors will soon be pushed to answer.
If the estimated value given in interviews by Saudi deputy crown prince Mohammad bin Salman is to be believed, the stock market debut will create an oil giant which would easily trounce its next largest rival, Exxon Mobil, which stands at just over $350 billion. In fact, the market capitalization would still dwarf Exxon, Apple, Berkshire Hathaway and Google combined.
Its size borders on the preposterous — even a five per cent listing would make up a potentially destabilizing 20 per cent of the $400 billion Saudi stock market.
Robert Powell, of the Economist Intelligence Unit, says $2 trillion is quite possible. “It’s entirely plausible given the scale of Saudi Aramco’s reserves – although that’s not the main factor. It’s the cost of its oil production, which is the lowest in the world at probably just $2 a barrel and some would say even lower,” he says.
Saudi Arabia is one of the few oil-producing regions where healthy profits on upstream oil production have been possible even as prices fell.
High-cost producers in the North Sea, the U.S., Canada and Venezuela have been left crippled by oil prices which slumped to sub-$30 a barrel earlier this year, decimating industries with a $60 a barrel break-even rate. For Saudi Aramco, a market downturn is painful, but far from terminal.
“It’s a pretty lucrative combination. $2 trillion is a relatively mind-blowing figure but Exxon is about $360 billion to $370 billion and they have nothing like the reserves or the extraordinarily low cost base that the Saudis enjoy. It’s plausible,” he adds.
There’s clearly an appetite for high-quality Saudi assets. And Aramco is as high-quality a Saudi asset as you will find
Ilesh Patel, partner at energy advisory firm Baringa Partners, says that a rough estimate of Aramco’s value based on production, reserves and assets over a 10-year investment horizon would validate the $2 trillion figure even at prevailing prices at $40-$45 a barrel. Higher oil prices could bring an even better deal for would-be investors. “Any listing of Saudi Aramco is effectively an investor taking a long-term view on oil price exposure. In essence, investors would need to believe in an oil price of $40-$45 a barrel long term, which is where we are today. So for the lowest-cost producer in the world, it’s not a bad deal – actually, it could be undervaluing it,” he says.
“If you then include refining and marketing, which is probably one of the most profitable pieces of their business, then it makes you wonder whether there could be more value here than the $2 trillion implies,” he adds.
For investors, the opportunity to snap up Aramco stock is “highly appealing,” says Mr Powell. “It is a unique opportunity. No company like this has appeared on any stock market ever. We also have something to go on: which is the demand not only for Saudi sovereign debt, but Saudi Aramco debt. They’ve gone to the market and raised money in the past year and there was plenty of demand.
“There’s clearly an appetite for high-quality Saudi assets. And Aramco is as high-quality a Saudi asset as you will find,” he says.
But in the eyes of some investors, there are question-marks, too.
Stewart Williams, senior vice-president at oil advisory firm Wood MacKenzie, says the way that Aramco handles its revenues could play a major role in its valuation.
For the Saudi kingdom, Aramco is a vital stream of wealth, providing around 90 per cent of its income. It is not known exactly how much of Aramco’s wealth makes its way to government coffers, but as the lifeblood of the Saudi economy, it can be assumed that the proportion is substantial.
The precise size of the stake and the value of the company are key. But it is also unknown whether the kingdom plans to sell a stake in the parent company or a collection of downstream assets, such as the new stable of advanced oil refineries. Aramco’s assets are vast, and run the gamut of the hydrocarbon supply chain as well as assets including hospitals, stadia and a modest fleet of jets.
Beyond the listing prospectus the need for greater ongoing transparency from the notoriously secretive Saudi oil bosses will let the light in on what is one of the world’s most opaque companies. Aramco will need to open the lid on profits, costs and what its top executives are paid.
“In terms of the various conspiracy theories which have circled around Aramco – does it have the kinds of reserves it claims? Are some of its biggest fields running out of oil? – this could either put them all to bed or bring them back to life. It will still be a significant revelation,” Powell says.
The willingness of the Saudi rulers to embrace a more transparent approach to their most prized financial asset is in line with their wider drive to revolutionize its oil-drive economy to transform the kingdom into a global investment magnet.