April 2, 2019 / 1:59 PM / 5 months ago

Breakingviews - Saudi Aramco is big, just not big enough

An Aramco oil tank is seen at the Production facility at Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabia May 22, 2018. Picture taken May 22, 2018. REUTERS/Ahmed Jadallah

NEW YORK (Reuters Breakingviews) - Saudi Aramco is enormous – staggeringly so. Yet by one measure that matters a lot – the $2 trillion valuation envisaged by Crown Prince Mohammed bin Salman – it’s still not enormous enough.

The world’s largest oil producer disclosed the state of its finances for the first time on Monday as part of a bond issue to fund the $69 billion purchase of a stake in Saudi Basic Industries Corp (SABIC). Titillating details include Aramco’s towering $224 billion of EBITDA, and much new information about the way the company works with its sole shareholder, the government of Saudi Arabia.

It helps shed light on the question of what Aramco’s main crude-oil business is worth, adding flesh to the bones of a valuation Breakingviews laid out back in 2017 in an interactive calculator. At that time, the company was flirting with an initial public offering, which MbS said could value Aramco at $2 trillion. By Breakingviews’ estimates, using a discounted cash-flow valuation, that target was about twice what Aramco was actually worth.

Many of Aramco’s secrets are now in plain sight. Take its remarkable efficiency. The company finds and extracts crude oil for just $7.50 a barrel, where Breakingviews had assumed $9. The earlier analysis further assumed $2 a barrel of overheads, but the reality looks lower – perhaps $1.50. Breakingviews also assumed Aramco could jack up production to 12.5 million barrels a day, where it has instead stuck at around 10.3 million. Plug the new numbers into the 2017 model, and Aramco is still worth just $1.1 trillion.

But there’s another important variable: the oil price. Then it was around $50 a barrel, now it’s $70. If that level sticks, Aramco could be worth $1.7 trillion, the calculator shows. That’s closer to the prince’s target, and perhaps why he is now more relaxed about raising the curtain around the producer’s finances.

Even then, it’s a generous estimate. Around one-third of Aramco’s crude oil is sold not to third parties at prevailing prices but to Aramco’s “downstream” business, which must supply Saudis with energy at state-controlled prices, reducing its potential profit. The kingdom is moving towards paying the market price for its efforts, but for now, that’s a plan rather than a fact. And so, therefore, is the idea of Aramco attaining that prized $2 trillion valuation.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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