Are we any nearer to knowing what Saudi Aramco is worth?
It’s a question that has been bouncing around since the Saudi deputy crown prince Mohammad bin Salman floated the idea of a share sale early last year.
The latest ripple of excitement concerned an evaluation of its oil reserves, details of which have been a closely guarded state secret for decades.
The point of interest was a story, citing unnamed sources, that Gaffney, Cline & Associates, a London subsidiary of the oil services company Baker Hughes, had completed its commission to audit Aramco's reserves, something that is a prerequisite for any company looking to list its shares in New York or London.
What did the independent audit find?
Apparently, that reserves were indeed as Aramco had been reporting them – that is to say a little above 260 billion barrels, or maybe "higher" but "not below" that figure, unchanged for several decades.
If that were the case, what would it mean for valuing Aramco shares?
As Tom Ellacott, the head of corporate analysis at the consultancy Wood Mackenzie, explains, the fundamental way the oil industry values a company is an asset-by-asset assessment of its ability to generate cash over time.
This means figuring out how many barrels it will be entitled to, how much per barrel it costs to extract, transport and market, etc. A discounted cash flow (DCF) analysis is used to put a current value on that – WoodMac uses a standard interest rate of 10 per cent a year to discount the cash flow. The compounding effect of DCF means that the present valuation is based heavily on the first few years.
So Aramco’s public shares would be valued on its ability to generate cash over the next few years, not on the outright value of Saudi Arabia’s oil reserves, which theoretically might produce for 70 years at current output rates.
And as Khalid al Falih, Saudi Arabia’s energy minister and the former head of Aramco, and other high Saudi officials have made abundantly clear, the oil reserves belong to the country, not a future public company.
The new public entity would have a – presumably exclusive – concession to produce and sell that oil. But what would be the terms of that concession? What would be the royalty and tax rates? What would be the likely effect of production restraint, either under an Opec agreement or for other reasons directed by the government?
The kingdom has yet to begin to address these questions, which might affect the discount rate investors use and therefore the value. Higher risks mean a higher discount rate and a lower valuation.
There are many other factors that will go into valuing Aramco public shares, such as its costs compared to its peers, how quickly – and efficiently – it makes good on its promise to acquire more downstream assets to balance its upstream; in other words, to make itself more like ExxonMobil.
The American company reported fourth quarter and full-year financial results yesterday, saying it made only US$8 billion last year before taxes on total revenue of $226bn. Pre-tax earnings the year before were $22bn on $269bn of revenue.
Exxon said it earned almost nothing in upstream, where it produces the oil equivalent of just over 4 million barrels per day (compared to Aramco’s current rate of about 10 million bpd), mainly because it took a charge to write off some US assets. Downstream – both oil refining as well as chemicals production – accounted for almost all of its profit.
ExxonMobil’s share price has been among the industry’s most steady, even with its earnings last year being just a quarter what they averaged in the 2012-14 period.
At about $84 a share yesterday, Exxon’s market value was about $345bn.
Is Aramco worth almost six times as much as ExxonMobil, as some have speculated?
Does it have the same ability to manage its assets and produce cash – after the government’s take – as Exxon has shown over decades?
Aramco will have to start making a lot more information public before that can be answered. It could start with the reserves audit.
Asked about the audit and any plans to release information in the run-up to a share sale, a company spokesman said: “Saudi Aramco does not comment on rumor or speculation.”
amcauley@thenational.ae
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