When Saudi Arabia first floated the idea of taking a portion of its giant Saudi Aramco oil company public, the government figured the firm could sell about 5% of Aramco to raise $100 billion. That valued the whole company at around $2 trillion. Not so fast say industry analysts at Wood-Mackenzie.
According to WoodMac, Saudi Aramco may be worth no more than $400 billion, 80% less than the Saudis believe the company is worth.
What makes valuing Saudi Aramco so difficult is that estimates are nothing more than educated guesses. The company's proved reserves have never been verified by an independent source, and the claim of 261 billion barrels has not changed in decades. Compounding the valuation problem is that Saudi Aramco has never publicly released financial statements.
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The valuation of Saudi Aramco's proved reserves is based on the company's own report multiplied by an industry-standard estimate of $8 a barrel, the number used as a benchmark to value proved but undeveloped reserves.
Bloomberg News also notes another factor casting doubt on Aramco's valuation:
The second factor throwing doubt on the Saudi valuation is the centrality of tax and dividend policy in assessing a company’s fair value. Aramco, formally known as Saudi Arabian Oil Co., pays a 20 percent royalty on revenues and an 85 percent income tax. Levies this big reduce cash available for dividends to shareholders, diminishing the appeal to overseas investors.
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It's worth noting that royalty payments and taxes not only support the Saudi government, but are also shared out with some 15,000 family members in the six branches of the Saudi royal family. The New York Times reported last December:
The sale of oil provides billions of dollars in annual allowances, public-sector sinecures and perks for royals, the wealthiest of whom own French chateaus and Saudi palaces, stash money in Swiss bank accounts, wear couture dresses under their abayas and frolic on some of the world’s biggest yachts out of sight of commoners.
The Kingdom's government cancelled about $250 billion in spending on domestic programs last year, an austerity program of sorts for ordinary citizens at the same time that the country's ruler completed a new palace in Morocco.
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Can the royal family maintain this lifestyle while the rest of the country tightens its belt?
The initial public offering of Saudi Aramco shares could happen as early as next year. Even if it doesn't happen, we'll know a lot more about the country and its oil reserves than we do now.