But that is only one metric for an energy company’s worth. By other measures, the target valuation of Aramco might be challenging.
The head office of Aramco is in Saudi Arabia, a state in a volatile region with a war in Yemen on its doorstep.
For instance, Exxon’s competitions Shell (RDSa.L), BP (BP.L) and Total (TOTF.PA) trade at EV/EBITDA of around six times. It would have to show core earnings at an astonishing $ 330 billion a year to achieve a valuation of $ 2 trillion, if Aramco was assessed at the level.
Investors have long debated whether Aramco might be valued anywhere close to $2 trillion, the figure suggested by Saudi Crown Prince Mohammed bin Salman, who wishes to raise cash through the IPO to finance investments aimed at helping wean the world’s largest oil exporting country off dependency on crude.
Exxon by comparison has less than half Aramco’s output – with oil-equivalent production of 4 million bpd in 2016, while the U.S. company’s reserves are a fraction of Aramco’s – with proved oil-equivalent reserves of about 20 billion barrels.
“So if the price of oil goes to $70 per barrel, it is not impossible for Aramco to earn a top line of $250 billion a year. Given that operational costs of Aramco are among the lowest in the world, it is not impossible to see them reporting the bottom line or earnings on a massive scale — of $100 billion a year and above,” he said.
When exercising the valuation of Aramco, Financials investors will also assess country risk.
Additional reporting by Alex Lawler and Rania El Gamal; Writing by Dmitry Zhdannikov; Editing by Edmund Blair
Aramco would do well to secure the high ratios of Exxon. Investors tend to like Exxon more than other oil companies, handing it ratios that are sometimes more generous than popular technology companies like google (GOOGL.O) and Apple.
An EBITDA figure would be a first. No firm in any industry has reported earnings before interest, tax, depreciation and amortization (EBITDA) above $100 billion.
By comparison, Apple (AAPL.O), the technology giant and the world’s most valuable listed firm that is worth more than $830 billion, reported EBITDA of $82 billion in 2015, according to Thomson Reuters Eikon data.
“Based on the Saudi current-account equilibrium, Aramco had revenues of $160 billion last year from just oil and refined products exports when the average price of oil was $43 a barrel,” Mohamedi said.
Exxon benefits even though some of production and its operations are in nations.
Nevertheless Aramco could prove hugely rewarding, given its oil output of about 10 million barrels per day (bpd) and a few of the world’s cheapest crude recovery rates, alongside its global refinery network that adds further value.
LONDON (Reuters) – When oil giant Saudi Aramco discloses its financials for the first time next year, it has to either surprise investors with world record profits or reduce its aspirations for a $2 trillion valuation in its initial public offering (IPO). [IPO-ARMO. SE]
“This is highly speculative. We don’t comment on speculation or rumor,” the company told Reuters in a statement.
The source said it was misleading to compare Aramco with Exxon, which has less than half of the Saudi firm’s oil output and not even a 10th of its reserves. EBITDA shouldn’t be the only measure, the source added.
When asked to comment on how it would achieve the $ 2 trillion figure, Aramco would not be drawn.
(GRAPHIC: Aramco’s potential valuations and metrics – tmsnrt.rs/2fH0rkr)
Aramco hasn’t published results, but decisions about its earnings can be drawn from Saudi Arabia’s accounts, given oil constitutes the lion’s share of the country’s revenues, said Fareed Mohamedi, chief economist at U.S.-based Rapidan Group.
A Saudi industry source said the worth of Aramco couldn’t be calculated to assess investor appetite.
“One thing you never do before an IPO is to tell the market how much the firm will be worth as you instantly become hostage to a number or a timetable,” said a Western investment banker, who had been involved in listing another state energy firm.
Released at Fri, 08 Sep 2017 15:36:10 +0000
Yet an easy calculation using internationally accepted ratios for Aramco’s peers – enterprise value versus core earnings (EV/EBITDA) – reveals the Saudi firm has to report EBITDA in the region of $130 billion to achieve a $2 trillion valuation.
“Aramco is definitely a fantastic, modern and high-quality company,” said the Western banker. “But unfortunately, no one can say that Saudi Arabia is a fantastic country from the geopolitical prospect.”
Exxon Mobil (XOM.N), the world’s largest listed energy firm with a market capitalization of $365 billion in 2016, reported EBITDA of $23 billion last year, according to Thomson Reuters Eikon data. In 2012, it reported EBITDA of $65 billion – when oil traded above $ 100 a barrel, but that was. Benchmark Brent crude is around $54 LCOc1.
Until Aramco publishes financial results prior to the IPO in 2018 most metrics for the world’s largest oil are not known and won’t be revealed.
Exxon traded last year. Its core earnings would have to be to achieve its target valuation, if the same high ratio was matched by Aramco.