What’s the Value of Saudi Aramco?

What is Saudi Aramco?

Saudi Aramco is the state–owned oil company of the Kingdom of Saudi Arabia and a fully integrated, global petroleum and chemicals enterprise. The company manages the world’s largest crude oil reserves and produces more than 10% of the world’s crude oil. It also owns and operates the world’s largest single–site crude oil refinery.

In addition to crude oil, Saudi Aramco’s activities include natural gas exploration, production, processing, and liquefaction; refining; marketing; transportation; and the petrochemical industry. The company has a strong global presence, with operations and activities in more than 70 countries. Saudi Aramco’s upstream operations are focused on exploring for and developing Saudi Arabia’s hydrocarbon resources.

The company works to maintain its leading position in reserves, production, and reserves–to–production ratio. Downstream operations are focused on creating value from Saudi Aramco’s crude oil and gas production through refining, marketing, and global trading.

The company has a refining capacity of more than 5 million barrels per day and exports its products to customers in more than 100 countries. The company’s chemicals business is one of the world’s largest integrated chemicals enterprises. It manufactures more than 75 million tons of ethylene and other chemicals per year and has a global customer base.

What’s the Value of Saudi Aramco?

In the Financial Times, the claim was made (FT subscription required) that Saudi Aramco has a value of close to $7 trillion, which would make it more than 20 times as valuable as ExxonMobil, the largest U.S. company, and about one-third the size of the entire U.S. stock market. This is incredible – the question is whether or not it is true.

Determining the hypothetical market capitalization of Saudi Aramco is somewhat difficult because it is completely state-owned, and thus has expenditures that may not be related to its profit-making mission. So to put a bit of structure on this problem, let’s do the following thought experiment: Suppose that Saudi Aramco does what Petrobras, the Brazilian national oil company, did in the late 1990s when it was partially privatized and sold about half of its shares on the public markets. The Petrobras experiment was tremendously successful; Saudi Aramco as a company, and the Saudi Arabian economy, would probably benefit from partial privatization of Saudi Aramco. Unfortunately, I don’t see this happening any time in the near future.

Major Oil Companies and Their Market Cap and Oil Reserves

	Market Capitalization	Proven Reserves (BOE)
ExxonMobil	$366 B	22.8 B
Chevron	$284 B	20.5 B
Shell	$194 B	18.0 B
Petrochina	$142 B	11.9 B
BP	$93 B	11.9 B
Petrobras	$71 B	14.8 B

 

The question I have is the following–let’s suppose that Saudi Aramco partially privatizes, sells off 10% of the company on the public markets, and starts to run the company like a private company like Petrobras did. What do you think that 10% stake would be worth? The Financial Times is suggesting that the stake would be worth $700 Billion. I think it would be worth substantially less.

More Thoughts on the Value of Saudi Aramco

Now that I have many responses to my query about the value of Saudi Aramco, I would like to add my own two cents. The Financial Times estimate of $7 trillion is very rough. They were simply suggesting that if the Saudi Aramco reserves were 15-20 times as large as those held by ExxonMobil, then Saudi Aramco should be worth 15-20 times as much.

Costs of Extraction

Among other things, this analysis ignores the costs of extraction – for example, I suspect that the cost of extracting Saudi Aramco’s reserves are less than the costs of extracting most of ExxonMobil’s current reserves. Moreover, ExxonMobil’s reserves will be extracted within the next 20 years, while Saudi Aramco is likely to be pumping oil from their existing reserves for at least the next 50 years.

The Financial Times analysis also ignores differences in the two firm’s abilities to profitably discover and exploit new reserves. I think I would give the nod on this dimension to ExxonMobil.
Finally, both firms have substantial assets in chemical plants, refineries etc., that are not included in these calculations.

A Rough Valuation

My own (equally rough) valuation of Saudi Aramco involves discounting the firm’s future cash flows back to the present. Saudi Aramco is currently producing about 4 billion barrels of oil per year, which at current prices is worth a bit more than $300 billion. We must then make an assumption about the annual costs of extraction–which probably run about $40 to $80 billion.

Finally, we need to estimate how much of the company’s annual profits is going to be paid to the Saudi people in the form of taxes and royalties. Let’s assume that the government takes somewhere between 30% and 50% of the profits, leaving Saudi Aramco with, very roughly speaking, between $110 billion and $180 billion in annual profits.

If we believe that the firm’s annual profits are roughly equal to its annual cash flows and we assume that this cash flow will grow by about 5% per year (because of a combination of rising oil prices and an increase in output), and if we use a 10% discount rate, then the value of Saudi Aramco would be between $2.2 trillion and $3.6 trillion. This estimate is considerably lower than the $7 trillion reported in the Financial Times.

Could we justify a $7 trillion value with this methodology? Probably, but the assumptions would have to be very aggressive. In the survey, over half of the respondents suggested that 10% of Saudi Aramco would be worth less than $400 billion, with the most respondents suggesting that the value would be between $200 billion and $400 billion. I think that is about right.

References

Financial Times – Bigger Oil, Bigger Oil