DUBAI – Saudi Aramco this week briefly achieved a market value of $2 trillion, an estimation banks, investors and analysts are reluctant to acknowledge.
The figure has brought more doubt than certainty.
“There is such a big gulf between domestic and international investors,” said Ben Cahill, Director Research and Advisory at Energy Intelligence.
Energy Intelligence’s valuation of Aramco was $1.1 trillion to $1.3 trillion.
Cahill said that international investors balked at a valuation above $1.5 trillion, and many thought the true valuation should be well below that level.
“The $2 trillion figure is a nominal valuation based on a tiny free float of 1.5 percent of Aramco shares,” he added.
It is believed that there is a potential conflict between Saudi oil policy and the imperative to protect Aramco’s share price.
Saudi Arabia just agreed to deepen production cuts as part of the OPEC-plus deal, but this means lower volumes and less revenue for Aramco unless there is a price rebound.
It is unclear what would happen if the share price declines.
“Aramco’s valuation proves that the world is not moving away from oil as quickly, as the valuation is driven mostly by the estimated value of long-term reserves,” said Daniel Lacalle, Chief Economist at Tressis.
Lacalle added that in this capacity Aramco can have an important influence on global markets by showing that its strategy is aligned with minority shareholders and stakeholders alike.
However, the company could only prove international investors wrong “through delivery and transparency.”
Aramco is a state-owned company with different targets to independent producers.
“An investor needs to be aware of the Kingdom’s long term strategy to invest, and be comfortable with that view,” said Lacalle.
It is the world’s largest oil company with the lowest cost reserves, however, investors are focused on dividend yield and free cash flow.
One of the advantages that the company promised was a dividend of $75 billion for 2020.
However, it has laid out the risks of investing in the company as the bet is on the price of oil, which has faced challenges due to the fluctuations in prices and the backlash oil companies face for their role in climate change.
“At a $2 trillion valuation, the dividend yield is just 3.75% – well below the supermajors. The higher valuation was a political goal but it presents some real downside risks,” Cahill added.
The start of trading in Riyadh marked the end of years-long speculation on the move by the Crown Prince Mohammed bin Salman’s rise to global prominence and his Vision 2030 plan to reform the Saudi economy.
He first made the announcement in an interview in 2016 with an ambitious $100 billion IPO and a valuation of $2 trillion.
The $2 trillion valuation of Aramco is viewed by some as a “point of nationalism and pride” for Saudi Arabia.
The insistence on reaching this valuation is tied up with their Vision 2030 reform program to diversify the economy.
The IPO has relied on some of the Kingdom’s richest families, and its GCC allies.
“The Aramco float was MBS’ flagship idea, so it is tied to his image and his legacy,” said Varsha Koduvayur, Research analyst at The Foundation for the Defense of Democracies (FDD) in Washington.
The expert added that the valuation is not “an authentic” valuation given that the investors are local with a small number of international investors, if any.
Simultaneously, the company is also proactively diversifying into its downstream sector and creating joint ventures with many Asian countries, who are some of its biggest customers, to ensure a continuous demand from customers.
Earlier, Saudi Arabia announced a 1.02 trillion riyals ($272 billion) budget for next year.
In the statement, it said that the real growth in its gross domestic product, which is adjusted for inflation, was expected at 2.3 percent in 2020.
Meanwhile, revenues are expected to fall from 917 billion riyals expected in 2019 to 833 billion riyals in 2020. Hence, widening the budget deficit to 187 billion riyals.
It was previously announced that the money from the IPO would be reinvested by the Saudi Public Investment Fund (PIF) to ensure growth in other sectors.
The listing is expected to bolster the country’s balance sheet.
“Aramco is the Kingdom’s crown jewel,” Koduvayur concluded.