Saudi Aramco – lifting prices before the listing


Concerning the planned listing of a stake in the Saudi Arabian Oil Co, here’s what we know:

  • There’s a plan to list 5% of the shares of Saudi Aramco that could value the company in the trillions of dollars.  It was first announced by Crown Prince Mohammed bin Salman in April of this year.  The government wants/hopes to raise $100 billion from this sale of 5%.  (Since we can perform simple math, we know that intimates a $2 trillion valuation, making it by far the largest corporation by  market cap.)
  • The listing will occur on the Saudi stock exchange but also likely foreign bourses: Hong Kong, London, New York
  • No definite time has been set, but early 2018 has been suggested.  In fact…  “We are optimistic,” CEO Amin Nasser told CNNMoney’s John Defterios. “The market has started to recover, we expect it to recover even more in 2017 and I think the time in 2018 will be almost right.”
  • To balance the massive upstream part of the business, Saudi Aramco plans to double its refining capacity by 2030 to 10 million bbl/day, which will require a $300 billion investment over the next 10 years.

Moving the needle….

Assuming that the Kingdom still has 270 billion barrels of proven reserves and $10/bbl of variable costs, a higher crude price translates into a higher valuation.  For fun, we conduct a free cash flow valuation.  270 billion barrels will last 75 years at 10 million barrels / day production.  I applied a 6% discount factor and a $55/bbl crude and computed a valuation of $2.6 trillion without any taxes.  To normalize with the Kingdom’s IPO estimate, let’s standardize with a 25% sovereign tax to arrive at $2 trillion.

If we now assume a $65/bbl long run price, it pumps up the valuation to $2.4 trillion (or $120 billion for 5%).  Just to be clear: It is entirely reasonable to assume that the Saudi leadership will target mid-60s to mid-70s via OPEC production quotas that rebalance the crude market in 2017.

Why not let prices run away again into the $100s?

As we saw a few years ago, above $100/bbl the whole supply stack is in play, from deep offshore to Canadian oil sands to fuel substitution.  Also this: oil above $100 allow the Saudis’ regional competitors to grow stronger, which breaks unspoken rules in their geopolitical playbook.






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