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Saudi Arabia's Final Attempt To Boost Aramco's Valuation

Nick Cunningham

Saudi Arabia is gearing up for the Aramco IPO, pulling out all the stops to boost the company’s valuation. But it’s a desperate attempt that is riddled with risk.

Saudi Arabia is reportedly bullying the ultra-rich in the country to invest their money in the offering, a pressure campaign that has echoes in the 2017 Ritz-Carlton shakedown.

Aramco is also dangling the possibility of larger-than-advertised dividend payouts to investors. “Aramco management has stressed the possibility of additional distributions to shareholders above and beyond the minimum dividend pledge,” Bank of America Merrill Lynch said in a report for investors seen by the Financial Times. Higher dividends would be made possible by borrowing, while the notion is also hinged on some optimistic assumptions on higher oil prices and steady increases in free cash flow.

But major banks are still not coming through for Aramco, putting valuation ranges on the company well below the $2 trillion figure that Crown Prince Mohammed bin Salman wants. “This is marketing material,” one banker told the FT, referring to the optimistic assumptions that Aramco is peddling regarding future oil prices.

Bank of America, for instance, says the company may be worth between $1.2 and $2.3 trillion, which, to be fair, would still produce a staggering number, although the range the bank offered is nebulously large.

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Some press reports suggest that MbS has come around to the idea of a lower valuation, perhaps in the range of $1.7 trillion. But, again, even that revised number could be overly optimistic. The danger is that the IPO flops and the share price slides, burning investors along the way. China may invest $5 to $10 billion in the company, but from China’s perspective, the investment serves geopolitical goals arguably as much or more than any financial outcome.

Ultimately, there are large questions surrounding the unique nature of Aramco, huge profits notwithstanding. The Abqaiq attack highlighted geopolitical risks to the company’s operations, revealing that a sizable portion of the country’s assets could be knocked out essentially overnight by an unexpected attack. That certainly has to be factored into the valuation of the company.

Meanwhile, Aramco can make promises to investors, but at the end of the day, the company and its shareholders would be entirely at the mercy of the King and his political goals, leaving little to no legal recourse for investors.

“For example, spending big to expand production capacity to maintain Saudi Arabia’s status as the world’s only real swing producer makes sense from a political standpoint; but for shareholders, spending money on spare capacity that may never be used makes little sense,” Torbjorn Soltvedt, principle MENA analysts at Verisk Maplecroft wrote in a recent note.

For the IPO to be successful, MbS may need to lower his sights even further. “A successful IPO is one that makes money for investors, not the one that commands the highest valuation,” Slava Breusov, a senior analyst at AllianceBernstein, told Bloomberg. Breusov added that Aramco is worth “way below $1.5 trillion.”

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MbS likely feels intense pressure to pull off an IPO with a high valuation, but pursuing that track is risky. “So far, MBS has very few policy ‘wins’ under his belt. And on the other side of the ledger, there are several clear failures: stalemate in Yemen, a stalled Vision 2030 reform programme, and the September 2019 attacks against the heart of Saudi Arabia’s energy infrastructure,” Torbjorn Soltvedt from Verisk Maplecroft said. “Achieving a nominal USD2 trillion valuation through strong-arm tactics will be a hollow victory if it reinforces existing concerns over governance and the rule of law.”

Meanwhile, Saudi Arabia is offering up Aramco within days of the OPEC+ meeting in Vienna, complicating both events. The valuation of Aramco is influenced by oil prices, and Riyadh’s strategy in Vienna is, at this point, highly influenced by its desire for a successful IPO of Aramco.

Nevertheless, press reports at this stage suggest that OPEC+ is likely to roll over the cuts rather than deepen them, which makes sense to some degree. Aramco may benefit from higher prices stemming from a deeper cut, but it would also highlight the political nature behind the company’s decision-making.

MbS has a lot riding on the IPO and there is no shortage of risks and landmines that stand in the way. But one of the few things that is certain is that the valuation will fall short of his vision. “[D]espite a broad range of measures to boost Aramco’s valuation, the USD $2 trillion target is likely to be beyond reach,” Soltvedt from Verisk Maplecroft concluded.

By Nick Cunningham of Oilprice.com

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