Saudi Aramco, Saudi Arabia’s national petroleum and natural gas company, recently announced plans to go public, CNBC reports.
As the movement to transition to cleaner energy (NYSEARCA:XLE) becomes more popular, Saudi Crown Prince Mohammed bin Salman has been thinking about diversifying Saudi Arabia’s economy beyond the oil (NYSEARCA:USO) industry. An IPO of Saudi Aramco would help do exactly that.
How? Says J.P. Morgan’s head of EMEA oil and gas research Christyan Malek, “The kingdom is looking at this as a way to deliver the non-oil side to effectively diversify. It is so important for the kingdom to basically raise profile, get FDI [foreign direct investment] into the country and arguably this IPO is one of those conduits.”
Saudi Aramco plans to list at a valuation over $1.5 trillion next month, which would exceed the market cap of the world’s most valuable company, Apple. How do they justify that number? “They cite the fact that Aramco is the most profitable business in the world, with an oil reserve life of 52 years. Further to this, Aramco’s oil reserves are the cheapest to extract,” CNBC reports.
While the Crown Prince is advocating for a valuation between $1 trillion and $2 trillion, investors are doing their due diligence and valuing the business based on cash flow, earnings, and dividends. As The Wall Street Journal reports, “Put Aramco on the same multiple of estimated 2020 earnings as Exxon or Chevron and it is worth roughly $1.5 trillion. Focus on cash rather than earnings and things don’t look quite so good. Exxon trades at 8.4 times 2020 cash flow, and Chevron at seven times; Aramco would be valued at less than $1 trillion on this basis. As analysts at Bernstein suggest, adjust for Aramco’s lower debt and a cash-flow-based valuation could reach $1 trillion to $1.25 trillion. Put it on Exxon’s 5.3% estimated 2020 dividend yield and Aramco would be worth $1.4 trillion, or $1.7 trillion at Chevron’s 4.3% yield. To reach the $2 trillion the Saudi crown prince once demanded would mean a dividend yield of 3.8%, lower than Western major oil companies.”
In the time leading up to the planned IPO date (Dec. 11), Saudi Arabia would like to keep oil prices high. To do so, it will be pushing OPEC members to cut oil output, says MarketWatch. The 13 oil-producing nations of OPEC will be meeting on Dec. 5. Until then, Saudi Arabia will continue to deal with the pressure brought on by the prospect of launching the biggest IPO in history.
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