Aramco Valuation Comes Under Scrutiny

Summary

Saudi Crown Prince Mohammed bin Salman says Saudi Aramco should be valued at $2 trillion for its initial public offering.

Aramco’s reserves are a staggering 266 billion barrels, the valuation of each of those barrels is particularly important.

Investors use many of other metrics—financial ones—to measure an oil company’s worth, and Aramco’s finances will not be known until next year, ahead of the planned IPO.

Saudi Crown Prince Mohammed bin Salman says Saudi Aramco should be valued at $2 trillion for its initial public offering, but its true value will only be known when the company releases its financials next year.

Because Aramco’s (ARMCO) reserves are a staggering 266 billion barrels, the valuation of each of those barrels is particularly important. If, for example, each of those barrels gets a $7 or $8 valuation, the $2 trillion valuation seems possible. But that’s not all what IPO valuations are based on.

Investors use many of other metrics—financial ones—to measure an oil company’s worth, and Aramco’s finances will not be known until next year, ahead of the planned IPO.

According to one such globally accepted metric for oil industry giants—enterprise value vs. earnings before interest, tax, depreciation, and amortization (EBITDA)—in order for Aramco to reach a company valuation of $2 trillion, it needs to report an EBITDA of around $130 billion next year, according to Reuters Estimates.

And this could prove quite challenging for the Saudi firm. No company ever—not only in the oil industry but in any industry—has reported such a high EBITDA figure, or EBITDA of more than $100 billion, according to Reuters.

To compare, Apple, for example, the most valuable listed company in the world, is now worth more than $830 billion and its 2015 EBITDA was just $82 billion.

Reuters data shows that Exxon Mobil reported EBITDA of $23 billion last year, and the world’s biggest listed oil firm currently has a market capitalization of $335 billion. At peak oil prices, Exxon’s EBITDA was $65 billion in 2012, but a barrel of oil is half the cost today that it was then.