Is Aramco Worth $2 Trillion? And Other Crucial I.P.O. Questions

Is Aramco Worth $2 Trillion? And Other Crucial I.P.O. Questions

LONDON — Saudi Aramco is undoubtedly huge and very profitable. But what’s the company worth?

That question was one of many left unanswered Sunday when the company, the world’s dominant oil producer, announced it would sell a stake to investors.

Just about everything about the initial public offering remains to be determined in the coming days and weeks, including how large a portion Aramco will sell, and at what price.

Most of the questions will revolve around decisions made by Crown Prince Mohammed bin Salman, the kingdom’s main policymaker. Aramco, which produces about one-tenth of the world’s oil output, is the centerpiece of the Saudi economy, and generates most of the government’s revenue.

So far the prince is moving cautiously. He is seeking a listing only on Riyadh’s Tadawul stock exchange. A foreign listing in a more complex and risky environment like New York or London has been deferred, and some analysts are skeptical about it ever happening.

The prince could even back away from the stock offering if circumstances change or it fails to sufficiently excite investors. The company has six months to list shares, under the approval granted Sunday by the Saudi Capital Markets Authority.

In recent weeks analysts have privately estimated that the sale would deliver a lower valuation than the $2 trillion goal the prince set more than three years ago. Now they are beginning to state those figures publicly.

Analysts at Bernstein, an investment firm, estimated that Aramco’s “fair value” was between $1.2 trillion and $1.5 trillion. In a note to clients on Monday, the analysts said they had based the estimate on metrics like dividends and earnings forecasts.

A person familiar with the offering, speaking on the condition of anonymity to discuss private conversations, said there were signs the prince was edging toward accepting a valuation around $1.8 trillion. A prospectus with more details is expected to be released soon.

Questions over the value of the company, which affects how much money the sale will raise, are a reminder that this initial public offering is highly sensitive politically.

The prince and Aramco executives are listing a company that is not only the lifeblood of the Saudi economy but an entity that Saudis hold dear. A disappointment — if, say, Aramco fails to attract investor interest and the share price sinks when trading starts — could backfire on the 34-year-old prince, who wants to use proceeds from the Aramco sale to fuel his high-stakes effort to wean the Saudi economy off its dependence on oil and government spending.

Analysts say the prince needs to be able to portray the Aramco listing as a win. Although young Saudis and the business community applaud many of the changes he has made, including allowing women to drive and making it easier for tourists to visit the kingdom, there are also big negatives on the prince’s ledger.

The protracted and costly war in Yemen has weighed on the country. There is also the lasting damage to the prince’s reputation from the killing of the Saudi journalist Jamal Khashoggi by Saudi agents in Istanbul last year.

“He cannot afford another failure,” said Paul Stevens, a distinguished fellow at Chatham House, a research organization in London, referring to the prince. “People are already beginning to question his competence and ideas.”

Mr. Stevens and others said that setting the $2 trillion price tag was a serious error, creating a benchmark that could result in a lower overall valuation’s being judged a failure.

As an investment, Aramco has considerable strengths. In 2018, it was by far the world’s most profitable company, recording net income of $111 billion. This year’s total is expected to be substantially less because of lower oil prices and production issues — Bernstein forecast net income of $92.3 billion for 2019 — but the company will almost certainly remain a money machine thanks to industry-leading low production costs.

And in an effort to appeal to investors, Aramco recently said that through 2024 private investors would be paid based on a $75 billion dividend.

Ultimately, the company’s appeal would be as a “defensive” stock paying a high dividend yield, said Neil Beveridge, a Bernstein analyst. Along with Saudi investors, he said, Aramco might appeal to sovereign wealth funds and strategic investors like other national oil companies.

Aramco remains vulnerable to the volatile political environment of the region, as shown by the September attacks on key facilities at Abqaiq and Khurais. In addition, Bernstein analysts note, there is “nothing stopping” the Saudi government from raising tax rates in the future.

Such risks are most likely behind the preference for a listing in Saudi Arabia, where investors may be willing to pay up for a company seen as a proxy for their country. The government is providing an incentive to Saudi investors, who will receive a bonus share for every 10 Aramco shares they buy if they hold them for at least 180 days. The offer is capped at 100 bonus shares.

“People believe in the company; they believe in the I.P.O.,” said Hussam A. Al-Saleh, who provides financial advice to Saudis in Riyadh. He added that on social media platforms like Twitter, “people who have not invested in the stock market before” were asking about Aramco and the I.P.O.

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