Fuzzy Math
Saudi Arabia Overestimating Value of its Oil Company

Saudi Arabia plans to sell off 5 percent of its state-owned oil company, Saudi Aramco, next year, and it hopes to make a lot of money in the process. But that expected windfall is dependent on a self-evaluation that company is worth $2 trillion dollars, while outside observers all seem to agree that the company is worth a lot less than that. Bloomberg reports:

Industry executives, analysts and investors told Bloomberg their analysis — based on oil reserves and cash flow projections under different tax scenarios — suggests Aramco is worth no more than half, and maybe as little as a fifth, of that amount.

So how, exactly, are the Saudis deriving that $2 trillion valuation? As Bloomberg points out, that’s as much as two Apple Inc.’s and an Alphabet Inc. That number is derived from a simple formula:

Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves)…By that logic, though, Russian producer Rosneft PJSC’s market capitalization would be $272 billion instead of $64 billion, and the valuation of Exxon Mobil Corp., the world’s largest publicly traded energy producer, would be 53 percent smaller than it is.

“I didn’t know that the value of an oil company was a multiplicator of the reserves of the company,” Total SA chief executive officer, Patrick Pouyanne, told investors on a Feb. 9 conference call. Several factors should be “discounted” before “we’ll see what will be the real value of” Aramco, he said.

Riyadh’s math, in other words, seems as elementary as it is sanguine.

These numbers are all very large, and that raises the stakes of this conflict between different evaluations over the company’s worth. If Riyadh is correct, the Saudis will raise $100 billion with this impending initial public offering. If energy consulting companies like Woods Mackenzie are correct (it places the valuation around $400 billion), the IPO will raise “just” $20 billion. You don’t have to be a math major to notice that that’s a big difference.

It’s especially important to the future fiscal health of Saudi Arabia. The petrostate has already poured plenty of money into a sovereign wealth fund, meant to help it weather bearish oil markets and to prepare it for a post-oil future, but the recent collapse in oil prices put a significant dent in the country’s net foreign assets. This IPO, it is hoped, could help Riyadh shore up that rainy day fund. There’s a lot that outside observers don’t know about Saudi Aramco, and that means we should view these estimations with a healthy amount of skepticism, but the sheer size of the gap in valuations should also cast doubt on Riyadh’s hopes for the IPO.

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