Saudi Aramco’s $2 Trillion Zombie IPO
Saudi Aramco’s $2 Trillion Zombie IPO
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In early 2016, Mohammed bin Salman said he planned to sell shares in the kingdom’s crown jewel: Saudi Aramco, the giant energy company that produces 10 percent of the world’s oil and finances the Saudi state. The initial public offering—planned for 2018—would be the deal to end all deals, raising more than $100 billion for a new sovereign wealth fund, creating the world’s most valuable listed company, and funneling hundreds of millions of dollars in fees to Wall Street’s elite banks. MBS, as the 32-year-old crown prince is known, said the company would be worth at least $2 trillion—more than double the current market valuation of Apple Inc.—and perhaps as much as $2.5 trillion.
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indifference from global investors doubtful that an IPO would benefit them, has forced Riyadh to delay the sale until at least 2019. And many observers—including members of the company’s senior leadership—doubt whether it will happen at all. Aramco has become the zombie IPO. Add Donald Trump to the mix. While the U.S. president has said he’s excited about the idea of Aramco selling shares in New York, keeping the price of gasoline under control seems far more important. [...] he’s pressured Saudi Arabia to pump more oil, and cheaper crude means a lower valuation for the company.
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There’s a wide gulf between MBS’s ambitious $2 trillion target—which the prince says is nonnegotiable—and the $1 trillion to $1.5 trillion that most analysts and investors see as more realistic, [...] The valuation problem has become more visible after Bloomberg News disclosed the first accountings of Aramco since its nationalization almost 40 years ago. The leaked documents included the company’s tax regime, until now secret. The accounts showed that Aramco was the world’s most profitable company, churning out $33.8 billion in net income the first six months of 2017—before taxes. Much of the cash the highly taxed company generates is channeled as royalties into the Saudi government budget.

How can investors be sure the government won’t raise taxes on the company to pay for more social or military spending, especially when the government already needs a price of about $80 a barrel to break even?
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A marginal rate of 20 percent of revenue is due for oil prices up to $70 a barrel, 40 percent between $70 and $100, and 50 percent above $100. The government also widened the volume of crude covered by the royalties. Previously, the royalty was applied to exports. Now, it’s on production.
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https://www.bloomberg.com/news/articles/2018-07-07/saudi-aramco-s-2-trillion-zombie-ipo
https://www.bloomberg.com/news/articles/2018-07-07/saudi-aramco-s-2-trillion-zombie-ipo

Labels: Oleg Zabluda

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