How much would 5% of Saudi Aramco be worth?
Saudi Arabia may sell a stake in its crown jewel, but raise much less money than its deputy crown prince thinks
IN 2005, McKinsey said Aramco was worth about $0.781 trillion. The Sovereign Wealth Fund Institute recently pegged its value at around $2.1 trillion. The Saudi deputy crown prince Mohammad bin Salman put the number at $2.5 trillion. Mohammed al-Sabban, a Saudi former petroleum advisor, reckons even more - at least $10 trillion. But what is Saudi Aramco, the kingdom’s state-owned oil jewel, really worth?
For decades that has been an academic question, at best. But then came the young prince’s interview with Bloomberg and, on 25 April, his announcement of plans to break Saudi Arabia’s oil "addiction", partly by selling off some of the state firm.
Salman talks of plans for a $2 trillion sovereign wealth fund, resting heavily on the transfer of ownership of the kingdom’s national oil company. For now, the plans envisage as little as 5% of Aramco being publicly listed with the rest to be held by the Public Investment Fund (PIF), the $87bn portfolio of which already includes the state’s shares of companies such as Saudi Basic Industries Corporation, or Sabic, and National Commercial Bank.
Most of the valuations of Saudi Aramco that have appeared in much of the media are based on simple benchmarks against publicly traded oil companies.
For instance, the Sovereign Wealth Fund Institute assumed a value of $10 per barrel of oil reserves and applied this to Aramco’s official 261bn barrels. But Aramco is not just your typical company, meaning that these yardsticks are simply not applicable - even when considering purely upstream assets.
A reasonable valuation has to be done on a bottom-up basis, estimating future cash flows and discounting them back to the present at a reasonable rate of around about 8-10% a year.
ExxonMobil’s reserves life is 16 years; Saudi Aramco’s is 64 years. ExxonMobil’s last barrel has a present value of about 20% of its first; for Aramco, the last barrel is worth 0.2% of the first. Because of this, it means – oddly enough, for the company with the world’s biggest low-cost resource base – that Aramco’s value is not that sensitive to the reserves assumed for it.
Net present values
And what oil price should we use to value the company? Aramco, as a price-maker, epitomises Saudi Arabia’s wider conundrum: it can increase production to win market share, but at the cost of lower prices. In the longer term - beyond 2040 or 2050 say - ever tighter climate-change policies, alternative energy sources and electric vehicles may gradually make oil redundant.
So while Aramco may have the world’s largest low-cost reserves, its Middle East peers can also be expected to battle hard to preserve their own revenues. These factors add up to constrain the plausible range of long-term prices, as well as currently-projected production levels.
Most other valuations seem to miss another point: Aramco pays tax. In her 2006 book Oil Titans, Valérie Marcel, of think tank Chatham House, shows that Aramco inherited its fiscal structure from a period in which it was American-owned. That translated to a structure in which a royalty rate of 20% and tax of 85% were and have been in place. Presumably this system would remain after transfer to the PIF, with the fund benefiting from its dividends, while taxes at those rates continued to flow directly to the Ministry of Finance.
Aramco’s gas business, which produced 10.5bn cubic feet per day (cf/d) in 2014 from reserves of 288 trillion cf, is hard to value. Much of the gas is associated, captured at low cost from existing facilities. Despite the recent hike in domestic gas prices, from $0.75 to $1.25 per million British thermal units, Aramco’s new non-associated gas developments – sour gas offshore, and onshore tight and shale gas – would probably not be viable on a purely commercial basis.
Many other parameters have to be factored into a full valuation: operating costs; decline rates; future exploration and reserve growth; expenditure to discover and develop new reserves; possible increases in costs as more difficult reserves are tapped; the regulated price and quantity for domestic sales and how quickly subsidies are eliminated.
Here it is fairly assumed that the Saudi government would take on the full burden of paying any and all of the remaining subsidies to come. These figures are hard to assess in the absence of much public information, but we can make some reasonable estimates using the official releases and a few regional comparisons.
Aramco has to execute the kingdom’s Opec policy. A move that sacrifices short-term revenues to boost long-term ones could be rational for a country, but negative for investors with higher discount rates and shorter time horizons. Even more uncertain are issues such as transparency and reporting, governance, minority shareholder rights, future changes in taxation, and political risk in and around the kingdom.
The results are most sensitive to assumed oil prices, particularly in the near term; oil demand growth; and critically the determined discount rate.
The value of Saudi Arabia’s hydrocarbon resources does indeed appear to be somewhere above $2 trillion, but most of this accrues back to the government in taxes. The value to Aramco shareholders of its upstream may, generously, be something in the region of around $250-400bn.
Aramco also has an equity share of refining capacity, both domestic and international (after the completion of Jazan, a refinery and terminal in the south west of the kingdom with an expected completion date of 2017), of 3.5m barrels a day.
Listed benchmarks, including its stakes in Petro Rabigh at home and S-Oil in South Korea, would imply an assumed value of around about $60bn.
Assets across the company’s petrochemicals (Sadara at $13bn or more), shipping (a $0.88bn stake in Bahri), trading, power (which sits at around $2bn for 6.5 gigawatts of capacity), and other holdings should add another $20bn or so.
Some extra credit could be given for future business development, given Aramco’s unique global status - for instance, its clout to enter refining and petrochemical joint ventures at home and in Asia. But these items may be partly offset by social obligations and non-commercial activities, which might need to be hived off under the circumstances of an initial public offering (IPO).
Clearly, the bulk of Aramco’s worth is in the upstream. All told, the suggested IPO of 5% of the company might then be worth about $20bn, which would be a much more digestible number for the market. Aramco would clearly be the most valuable component of the PIF, but numerous other assets would have to be added to achieve the suggested $2 trillion target.
The potential transfer and part-IPO of Aramco would be a radical move, but its implications for economic reform and political power in the country are more important than a mundane cash-raising exercise. The firm is easily the kingdom’s most glittering jewel, but some of the wilder guesses of its worth are tempered by the realities of the global market.
The author would like to thank Wassim Mourtada for contributing research to this article
Robin M Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis