Could Lack Of Transparency Hurt Aramco's Trillion Dollar Valuation?
With officials calling Saudi deputy crown prince bin Salman’s $2 trillion estimate of Saudi Aramco valuation as “unrealistic and mind blowing,” OilPrice.com’s Cyril Widdershoven notes the primary discussion taking place is the overall level of transparency offered by Aramco’s leadership, which is supported by the Saudi government.
Saudi Aramco’s IPO, slated to raise between $100 billion and $400 billion from a 5 percent stake in the company, will continue to make headlines until its launch. Lately, discussions on the valuation of Aramco have been intense, and the jury is still out regarding an exact price. Aramco’s IPO will be a game-changer, propelling the world’s largest National Oil Company (NOC) into a league of its own on the financial markets. The current market capitalization estimates of $1-2 trillion are based on valuations of Aramco’s hydrocarbon reserves carried out by independent consultants. These estimates put the giant oil company far ahead of any other publicly owned company. Two major questions remain to be answered however, one of which has been largely ignored by the mainstream media.
The primary discussion taking place is the overall level of transparency offered by Aramco’s leadership, which is supported by the Saudi government. After several days of attending the GCC Petroleum Media Forum (GCCPMF) in Abu Dhabi, attended by all GCC ministers of oil, including Saudi minister Khalid Al Falih, and a long list of government advisors, the issue of transparency has yet to be solved. Gulf oil ministers and CEOs still hold a very conservative idea about financial and operational transparency. There have been minor attempts by Aramco, ADNOC, and QP to open more data and insights to the financial world and media, but the world’s largest oil company remains far from transparent. When asked about the Aramco IPO and Saudi Vision 2030, the respective Saudi officials, including Khalid Al Falih, only produced basic media statements, already largely published in the Arab and global media outlets. Even the fact that the Forum was also meant to present a new OPEC-Abu Dhabi based data outlet, no real new information on reserves, production figures, or investment cycles were presented. Analysts still need to rely on figures presented by the existing outlets, OPEC-IEA-EIA-EIF.
Aramco’s IPO still falls short when it comes to accurately representing the level of reserves, operational figures, and income that we are used to when assessing international oil companies (IOCs) or independents. Yes, Aramco has increased its insights into what many consider the Holy Grail of the oil sector, aka Saudi Arabia’s oil and gas reserves (P1-P3-P5), but a lot still needs to be done to gain the same level of confidence as analysts can have with Exxon, Shell, BP, Apache, Tullow or Statoil. The lack of criticism by international media or analysts in regard to the Aramco IPO is startling. Most analysts have simply duplicated the assessments of Gaffney, Cline, and Associates, part of Baker Hughes and Dallas-based DeGolyer and MacNaughton, which have been published by Aramco itself.
Questions still remain on the real facts and figures. Ongoing criticism by the U.S. Securities Exchange Commission (SEC) on the reserves reporting of IOCs, such as Exxon, should be a cause for skepticism in the market related to the overall positive reporting currently in place. Until now, no real insights have been given on the depletion rate of Saudi Aramco’s fields, especially the Al Ghawar field. Taking unofficial assessments, such as a report by Simmons & Simmons years ago, decline on most Saudi producing fields could be above average. Without these insights and facts, it should be a major point of concern for investors assessing the IPO.
At the same time, there is an even more critical issue which is rarely addressed. Saudi Aramco, as an NOC, is fully integrated into the geopolitical and financial discussions of the Kingdom. At present, Aramco’s production and export strategies are 100 percent linked to the Kingdom’s overall geopolitical aspirations. As one analyst stated years ago, the Kingdom’s power in the world totally depends on its crude oil reserves and production figures. Even while Saudi deputy crown prince Mohammed bin Salman’s Saudi Vision 2030 is trying to diversify the nation’s economy for the era beyond oil, Riyadh’s geopolitical impact will depend on its crude oil potential through the next 40-50 years. The set-up of the Aramco IPO should be assessed against this backdrop. Offering 5 percent of Aramco doesn’t mean that the company will change into an (N)IOC. The majority shareholder is still the Kingdom itself, even though the ownership will officially be transferred to the Saudi Public Investment Fund – a 100 percent state-owned and regulated sovereign wealth fund (SWF).
Playing devil’s advocate; by offering a 5 percent stake in Aramco, Riyadh is not offering a say in the company, its operations, or an insight into its reserves potential. The only strategy currently in place is using the vast international interest for Aramco as leverage to access financial markets to counter the current use of Saudi’s vast international financial holdings. This strategy is working, and for this Mohammed bin Salman needs to receive full credit. The Saudis will not offer any real say in the operational and strategic decision-making process of Aramco, especially as it is the main geopolitical power instrument the Kingdom holds at present. In stark contrast to IOCs or independents, where minority shareholders can and will demand a say in the future of their investments, Aramco’s future will very much remain in the hands of Riyadh.
For shareholders used to investments in companies that are solely focused on setting up structures to increase ROI, shareholder value, or dividends, the Aramco IPO will be a difficult nut to crack. When assessing the value of your multibillion investment in the IPO, how are you going to assess future return on investments or dividends if your majority shareholder is not only interested in return on investments (financially) but also has a geopolitical interest? How are you going to deal with Saudi Aramco’s unilateral decision to play the oil market according to Riyadh’s unilateral political decisions? Investors will need to be fully intertwined with the inner-circle of the royals to predict and assess possible changes in Saudi strategy before it hits the market. At present, most of the investors showing an interest have an immense lack of knowledge of Saudi politics, power-structures, or even energy strategies. This situation doesn’t bode well.
Saudi Aramco’s IPO will be a market shaker of unknown proportion. Its overall financial impact will be immense as, whatever the outcome of the specific IPO, the Kingdom is already using its leverage to gain access to new investments. The Asia trip by King Salman last month is one of the clearest results of the IPO’s leverage build up. Most deals in China, India, and Indonesia were linked to Aramco, aimed at building bridges between Asian investors and the Saudi NOC. More interesting, however, will be the decisions of international financial institutions, knowing that they will not have any say in the future of the company. The Kingdom will never allow Aramco’s strategy to be changed by ‘normal’ global financial indicators. Aramco’s IPO is already being used as a political instrument of the Kingdom. Increased investments in Aramco or the Kingdom will be strategically placed by Riyadh to mitigate perceived geopolitical and economic risks.
Investors should be aware that Aramco’s price settings or production volumes will not change from the pre-IPO era when entering the IPO market. Saudi oil is, at present, the only sword in the armament of the Kingdom, mainly to be used to support the country’s interests. ROI or dividends will hold little to no importance if the survival of the Kingdom’s ruling structure is being threatened.