11/05/2017 07:05 AST
WHILE there is consensus that the public listing of the Kingdom of Saudi Arabia's crown jewel, Saudi Aramco, could very likely be the biggest the world has ever seen, valuations of the state-owned oil company vary widely. Some have put forward a valuation of $400 billion, a far cry to the $2 trillion valuation touted by Saudi Arabia's Deputy Crown Prince Mohammed bin Salman. Bassel Khatoun, Chief Investment Officer of MENA Equities at Franklin Templeton Investments (ME) Ltd, discusses what he sees as a set of 'known unknowns' that could influence the valuation of Saudi Aramco, and suggests an accurate valuation is premature pending further clarification of some of these issues.
The valuation spectrum for oil players varies immensely, and Saudi Aramco is no exception. Given its historical preference for opacity, the reality is that there is a lot of guesswork that goes into sizing up a company which has never divulged financial statements, operating in a sector that naturally attracts huge valuation variations in any market, let alone Saudi Arabia.
Capital markets around the world are certainly encouraged by the potential mammoth public listing and welcome the important milestone in the Kingdom's progress to diversifying its economy and to reduce its heavy reliance on oil. However, investors require a certain degree of transparency to make informed decisions about the value of a company.
Key to an accurate valuation, for example, is the defining of ownership boundaries of what parts of Saudi Aramco are to be listed; while some may value the company up to $2 trillion, there is no clarity on exactly which parts of Aramco will be included in the IPO, and just as importantly, which will be excluded. Furthermore, questions remain over whether both the upstream and downstream businesses and non-core areas such as petrochemicals are within the ownership boundaries.
In addition, until an independent audit has been completed, investors are basing valuation on the same oil reserves that have been reported by Riyadh for nearly three decades - 261 billion barrels. That said, Saudi Aramco has committed to an independent audit while hinting that any audit will find its reserves to be similar to figures currently reported, but questions remain about whether the audit will unearth the quality of the oil reserves, rather than just the quantity. Either way, Saudi Arabia's Deputy Crown Prince Mohammed bin Salman recently confirmed that the Saudi government would retain sole control over Aramco's oil and gas reserves and would also decide on production levels.
Another key area to an accurate valuation are costs - a crucial part of financial modeling. Disclosing production costs of oil wells and revealing operating and financial costs will enable investors to make more accurate projections of the value of the business. Ultimately, we are trying to understand how much it costs Aramco to extract oil from the ground. Aramco has said its costs are among the lowest in the world and, if the $5 to $20 per barrel public estimate range is accurate, then this is most certainly the case. The difference between an extraction cost ranging from $5 to $20 per barrel makes a significant difference when oil is $50 per barrel. Also, production costs will vary from field to field so providing average operating costs will only go so far to facilitate forecasting. Another key cost to consider is staff. To accurately estimate staff costs, investors need to understand Saudi Aramco's long-term strategy with regard to 'Saudization' given the cost implications of maintaining a very high percentage of Saudi Arabian nationals.
Clarity on the Kingdom's tax policy is another key to an accurate valuation of Saudi Aramco. In March, the government announced that it was reducing Aramco's tax rate on net income to 50% from 85%, bringing it more in line with global players, although there still exists a huge difference
Saudi Gazette
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