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Saudi Aramco Might Not Be A Paragon Of Transparency And Fair Accounting After All

Who could've guessed that an insular petro-state wouldn't be completely honest about the value of its only economic asset?
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King Salman (Getty Images)

King Salman (Getty Images)

If your idea of good corporate governance is a C-suite captive to a vindictive and cloistered royal family that rules a petro-state widely identified as the world's biggest booster of violent Jihadist terrorism, boy, have we got an IPO for you! Saudi Aramco is selling off a small chunk of itself with the help of a couple American investment banks, and you, too, could be a partial owner if the price is right.

The only issue is figuring out, exactly, which price is the right one for a black box of a company whose raison d'etre is serving as a personal money tree for the House of Saud. As it turns out, that task isn't an easy one. Saudi Arabia has pegged the value of its oil behemoth at $2 trillion. But those observers who are not hoping to start a sovereign wealth fund on the proceeds of the IPO have a different take:

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. This means Saudi Arabia would earn a fraction of the $100 billion implied by its valuation if it sells 5 percent to the public in 2018, as planned.

For example, Wood Mackenzie Ltd. came up with a rough valuation of Aramco’s core business of $400 billion, according to clients who attended a private meeting at the oil consultant’s City of London office this month and asked not to be named. The Edinburgh-based company, popular for its analysis and valuation of energy companies and assets, declined to comment.

Not a huge surprise here. Corporate executives have a tendency to overvalue their own companies. But the disparity between the kingdom estimates and those of impartial observers here isn't just a matter of wiggle room. And it's not just western financiers casting doubt on the monumental Aramco price tag:

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

Again, this should hardly be surprising. But the disagreement underlines the perilous task of leading a company out of the grip of an entrenched political class and into the harsh light of public markets. That's doubly true considering that Saudi Arabia, which currently derives 90 percent of its state revenues from oil sales, has staked its future on a transformation of its economy from essentially one big oil rig to something a bit more modern and diversified (i.e., one big venture capital fund). Indeed, energy minister Khalid Al Falih has called the Aramco privatization – and the money raised therefrom – “a key issue” for the Saudi reinvention.

The disagreement about Aramco's value, then, isn't just a matter of a few executives getting paid a bit more or less. The Saudi royal family sees its very future in the sale. So godspeed to those investment bankers at Morgan Stanley and JPMorgan who are reportedly working on the deal.

Saudi Arabia's Oil Wealth Is About to Get a Reality Check [Bloomberg]


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