Could Political Risk Lower Value Of Aramco Ahead Of IPO?

Suggestions about how much Saudi Aramco is actually worth as the oil giant heads for its IPO vary by nearly $1 trillion, and uncertainty surrounding the region's political volatility and the company's control by the Saudi government is raising more questions than any concerns about the profit potential of the company.

Estimates of Aramco's value have ranged from about $1.2 trillion to $2.3 trillion for the company that produces about one out of every 10 of the world's barrels of oil. Saudi officials value the company at $2 trillion, which would make its IPO the highest-ever in value. 

Close Ties To Kingdom

Aside from any concerns about regional instability, Wall Street Journal columnist James Mackintosh questioned Wednesday whether the company might be worth even less than the low end of the so-far suggested range based on concerns specific to the kingdom itself.

"My concern is that whatever the valuation, it will fail to take sufficient account of the political risk," Mackintosh wrote.

"Saudi Arabia has kept its absolute monarchy going with a combination of crackdowns and bribery. I can’t predict when or if it might go wrong, but if it does, Aramco stock could end up worthless. That justifies a discount to below $1 trillion."

Aramco is — and will continue to be - controlled by the Saudi government and is the source of the majority of the kingdom's revenue. But Crown Prince Mohammed bin Salman reportedly wants to use the proceeds from selling shares in the company on the Saudi stock exchange as part of his effort to reduce dependence on oil revenue and broaden the economy.

Most Profitable Company

There's little question Aramco will continue to generate profits: it was the world's most profitable company last year. Even with anticipated lower oil prices, the company has exceedingly low production costs, keeping profits high, and also has the largest reserves in the world.

Aramco has said investors will be paid through 2024 based on a $75-billion dividend, five times bigger than than Apple Inc's AAPL 2019 dividend.

Pushing Production Cuts

Meanwhile, the Wall Street Journal reported Wednesday that Saudi Arabia is pushing OPEC for bigger cuts in oil production ahead of the IPO.

The move, according to unnamed sources cited by the paper, is aimed at boosting the price of oil to remind potential Aramco investors of the kingdom's strong influence on the oil cartel. 

Related Links:

A Few Concerns Saudi Aramco Should Address Ahead Of IPO

Saudi Aramco, The World's Most Profitable Oil Company, To Launch IPO