IPO could reveal Saudi Aramco market value at $1 trillion-plus

Saudi Aramco could have a market value of more than $1 trillion in an initial public offering (IPO) after the government slashed the oil producer's tax burden to attract investors, analysts at Sanford C Bernstein and Rystad Energy said.

The tax cut will increase Aramco’s after-tax income by 300 per cent, allowing for higher cash returns to shareholders and giving the company, known officially as Saudi Arabian Oil Co, a potential market value of $1 trillion to $1.5 trillion, Bernstein analysts said in a report.

Rystad Energy increased its valuation of Aramco by 250 per cent to $1.4 trillion, assuming a long-term oil price of $75 a barrel.

The Saudi government announced on Monday it is reducing Aramco’s tax rate to 50 per cent from 85 per cent, as it prepares to offer investors as much as 5 per cent of the world’s biggest oil exporter in what could be a record IPO.

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Estimates of Aramco’s potential valuation vary widely. Deputy crown prince Mohammed bin Salman has said it’s worth about $2 trillion.

Prior to the tax change, consultant Wood Mackenzie valued the company at about $400 billion, according to clients who attended a private briefing earlier this year.

Western peers

"Before the reduction in tax, it was hard to argue that Aramco should trade at an equivalent value to western oil peers," such as Exxon Mobil, Bernstein analysts Neil Beveridge and Oswald Clint said in the report. "With the reduction in tax to 50 per cent, profitability per barrel is more in line" with those peers, and could be higher still, they said.

Saudi Aramco produces close to 10 million barrels a day, about 2½ times more than Exxon, which is valued at $337 billion. It also has vast deposits of low-cost crude, further augmenting its value, assuming that an independent audit backs up the company’s reserves estimate, Bernstein said.

Aramco’s reserves are estimated at about 260 billion barrels.

Saudi Arabia’s budget deficit is unlikely to widen as a result of the tax cut because the lost government revenue will be “mostly” offset by increased dividends, according to Bernstein.

Aramco also pays a 20 per cent royalty on its oil revenue, a levy that Monday’s announcement left unchanged.

The IPO will probably take place in the second half of 2018, according to Aramco chief executive Amin Nasser. – (Bloomberg)