Since Crown Prince Mohammed bin Salman eventually decided to offer shares in the world’s largest oil producer, Saudi Arabia is taking all the steps to ensure the success of Aramco’s initial public offering.
For the third time, the Kingdom has cut corporate taxes, revealed incentives for investors not to sell, and is considering further boosting dividends. Yet the Saudi government has admitted that the business is probably not worth the valuations of $2 trillion that Prince Mohammed has long advocated.
Aramco published a so-called intention to float on Sunday more than three years after the IPO was first mooted, the most dramatic change in the Saudi oil industry since the company was nationalized.
The Saudi Aramco IPO is a pillar of the 2030 Vision program of Prince Mohammed to prepare the Saudi economy for the post-oil period.
According to people familiar with the issue, Saudi Arabia plans to valuate between $1.6 trillion and $1.8 trillion. Bank analysts working on the transaction gave wildly divergent estimates: Goldman Sachs Group Inc. said Aramco was worth between $1.6 trillion and $2.3 trillion to investors. Bank of America, another top bank on the deal, had only $1.2 trillion at the bottom of its range. BNP gave a $1.42 trillion forecast.
With Saudi Aramco employing more than 20 banks at its IPO, investors have few options for research that is genuinely independent. Nevertheless, some outfits have begun to publish their estimates. For example, Sanford C. Bernstein & Co. said the fair value ranges from $1.2 trillion to $1.5 trillion, well below the projections made by the banks working on the IPO.
“This is the right time for us,” Chairman Yasir Al-Rumayyan said on Sunday at a news conference at Aramco’s headquarters in Dhahran’s eastern city. Aramco’s $111 billion net income last year made it the most profitable of any company–more than Apple Inc., Google’s parent Alphabet Inc., and Exxon Mobil Corp. combined.
Most bank valuations are based on oil prices that remain above $60 a barrel and assume that Aramco can raise oil production by 2021. Almost every bank assumes that in order to cover spending and dividend payments, Aramco will have to take on debt this year and next year. JPMorgan Chase & Co. published a 118-page report without offering an assessment but called Aramco the first “mega-major” oil company.
In order to boost investor appetite, Aramco said it would pay an income tax rate of 20 percent on its domestic downstream business starting next year, compared to current taxes of between 50 percent and 80 percent.
In addition to the changes in royalty payments already announced, the government also exempted condensate— a light oil produced in conjunction with natural gas— from the tax until 2033. These measures would have boosted free cash flow in the first six months of this year by $4.5 billion, the company said in the intention of floating documents.
Saudi retail investors will be eligible for one share per 10 allocated shares if they hold the shares continuously for 180 days from the first trading and listing date, Aramco said.
Aramco reported a net income of $68 billion and in the first nine months of the year generated $244 billion in revenue and revenue related to sales, he said in a statement. Next year, it predicts capital spending from $35 billion to $40 billion, rising to $40 billion in 2021 to $45 billion.
A position in the agreement has been hotly contested by global banks. With the biggest positions going to firms like Citigroup Inc., Goldman Sachs, and JPMorgan Chase, more than 20 have been appointed. To make the deal, bankers will need heavy contributions from the richest families in the kingdom, many of whom may have been targeted during a declared crackdown on corruption in 2017, when scores of wealthy Saudis were held in Riyadh Ritz-Carlton Hotel.
Aramco must also contend with the strengthening of the global climate change movement that has targeted the largest oil and gas companies in the world. Many fund managers are concerned that the shift away from the internal combustion engine — a technology that has driven a hundred years of steadily increasing demand — means oil consumption will peak in the next two decades.
Investors will also have to weigh up how to factor in rising geopolitical risks following attacks on Aramco’s crude-processing facilities in September that knocked out half of its output. The company said the production was quickly restored and no customer orders were missing, but the incident highlighted its vulnerability to regional military threats.