Saudi Arabia is considering selling shares of its state-owned oil producer, Saudi Aramco, in what could be the largest initial public offering ever, according to Prince Mohammed bin Salman, one of the country’s most powerful figures.
But attaching a value to the oil producer is tricky.
The Economist had an exclusive with the prince in which it first reported the potential I.P.O.:
Saudi Arabia is thinking about listing shares in Saudi Aramco, the state-owned company that is the world’s biggest oil producer and almost certainly the world’s most valuable company. Muhammad bin Salman, the kingdom’s deputy crown prince and power behind the throne of his father, King Salman, has told The Economist that a decision will be taken in the next few months. “Personally I’m enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco.”
The potential listing comes as Saudi Arabia grapples with the damage wreaked on its economy by an oil-price collapse to below $35 a barrel, as well as mounting tensions with its arch-rival Iran, following the execution of Saudi cleric Nimr Baqr al-Nimr in early January. It is just one possible step in an ambitious plan to balance the budget and throw open the country’s closed economy.
Prince Muhammad made the remarks during his first on-the-record interview, on January 4th, in which he ranged broadly, from the geopolitics of the region, to his efforts to foster radical economic reform in Saudi Arabia.
The prince has held two high-level meetings recently on the possibility of floating Saudi Aramco shares. Officials say options under preliminary consideration range from listing some of its petrochemical and other “downstream” firms, to selling shares in the parent company, which includes the core business of producing crude.
Officials say Saudi Aramco is worth “trillions of dollars”, but it is one of the world’s most secretive oil companies and reveals no information on revenues and offers only limited information on its hydrocarbon reserves.
Javier Blas of Bloomberg expanded on what Saudi Aramco’s actual value might be:
By any measure, Saudi Arabian Oil Co. is in a league of its own.
Take its oil reserves — roughly 260 billion barrels, nearly 10 times those of the global ultra-major Exxon Mobil Corp. Or its daily production — 10 million barrels, more than the domestic output of every U.S. oil company combined.
Which is why the mere suggestion that this state-owned oil giant might go public seems so outlandish. Would the Kingdom of Oil really place its crown jewel in the hands of fickle investors?
The answer is maybe. On Friday, Saudi Aramco confirmed it was studying options to allow “broad public participation in its equity through the listing in the capital markets” of either the whole group or a subsidiary.
The statement came a day after Mohammed bin Salman, the kingdom’s deputy crown prince, said in a newspaper interview that Aramco, the linchpin of the world oil market, was considering an initial public offering as Riyadh confronts the hard economic and geopolitical realities of cheaper and cheaper crude.
It’s impossible to overstate the power Aramco wields in Saudi Arabia and the global oil market. The company traces its origins back to the oil shortages of World War I and is deeply intertwined with the rise of one of the most powerful forces of the past half century: the modern petro state.
What is that worth? “Trillions of dollars,” according to The Economist, which first reported the prince’s comments. That would easily rank Aramco among the world’s most valuable companies, well above Apple Inc., at $600 billion. Based simply on its oil reserves and using a conservative valuation of roughly $10 per barrel, Aramco could be worth more than $2.5 trillion.
And yet stock market investors rarely value state-owned oil companies as dispassionately as the numbers suggest — or as government officials might hope. Should Aramco go public, it might actually fetch as little as $100 billion, based on valuations applied to similar state-owned groups.
Michael J. de la Merced of The New York Times explained why underwriting this I.P.O. would be any big bank’s dream:
The kingdom could have fetched an even higher valuation for its crown jewel before oil began plunging in price. (Brent crude closed on Thursday just above $33 a barrel.)
The kingdom would virtually certainly refuse to cede any control over the company if it is listed on a public exchange, which The Economist said would most likely be the Tadawul in Riyadh. While some companies with concentrated ownership have taken a hit on valuation, the biggest such market debutantes, like Alibaba and Facebook, have escaped such a fate.
Discussions about Saudi Aramco’s fate appear to be at an early stage. The Economist reports that Prince Mohammad has held two “high-level meetings” to discuss a potential stock sale. And discussions about how such a stock sale would look — whether it would be for some of the producer’s constituent businesses or for its parent company — are still going on.
At the least, the world’s biggest banks are undoubtedly salivating at the chance to work on such a big I.P.O., as much to claim credit for a prestigious assignment as it would be for the fees.
The company has relationships with many a major bank. Just look at the $10 billion in debt that Saudi Aramco secured last year: Deutsche Bank, JPMorgan Chase and Citigroup were among the underwriters.
Surely all of them, and Wall Street’s other top institutions, would compete hard to gain an I.P.O. mandate.
