Last week Saudi Arabia’s national oil company Aramco announced its intention to publicly offer shares on the Riyadh stock exchange. The IPO has been pending for several years, but many questions still abound.
One of the most important is “What is Aramco actually worth?”
It’s a difficult question, because it really depends on how you measure it. The valuation among 16 banks that offered a valuation ranged from $1.1 trillion up to $2.5 trillion. When you try to compare Aramco to a Western supermajor like ExxonMobil, you get very different valuations depending on which factors you prioritize.
For this article, let’s look at the dividend. This is just one consideration, but it does implicitly cover several other measures. In order to pay an ongoing dividend, the company has to generate enough cash flow. Thus, the company has to produce enough oil to generate that cash flow.
Aramco has committed to a $75 billion annual dividend through 2024. At a valuation of $2 trillion – which is the value that has been suggested by Saudi Crown Prince Mohammed bin Salman – the dividend yield would be 3.75%. At a valuation of $1.5 trillion it would be 5.0%, and at $1 trillion it would be 7.5%.
Which number makes the most sense?
This is why the valuation is tricky. Should Aramco’s dividend be considered as safe as that of ExxonMobil, which currently yields 4.8%? How about Chevron’s (3.9%), Shell’s (6.2%), or BP’s (6.3%)?
From a purely business perspective, Aramco’s cash flow is probably safer than that of all the above companies. But the Saudi government will be the majority shareholder of the company, and that’s where the Western oil companies are in a better position. Aramco shareholders won’t have any recourse if the government suddenly decides to cut or even end the dividend. That could happen if oil prices collapsed for an extended period. (Certainly this would pressure Western companies as well, but they might instead make deep cuts to capital spending).
Or, consider a situation that happened with Petrobras, which is primarily owned by the government of Brazil. A few years ago when oil prices spiked, the Brazilian government forced Petrobras to subsidize the cost of fuel for Brazilians, which directly cost Petrobras shareholders. The lesson is that sometimes the interests of the government are going to conflict with those of shareholders, and shareholders will lose.
Further, there is more geopolitical risk with Aramco, as evidenced by the September terrorist attacks that knocked five million barrels of oil production temporarily offline.
An investor interested in Aramco’s dividend is going to have to factor in not only the yield, but the confidence they have that the yield will be stable. The good news is that Aramco does have a long track record of delivering on its commitments. If it says the dividend will be $75 billion through 2024, you can have a high degree of confidence in that number – as long as the geopolitical issues are contained and oil prices don’t collapse.
Given all the factors, I would personally want a yield of at least 5% before I would be enticed by the dividend. A 7.5% yield would be extremely attractive, but probably not sustainable in a world in which the 10-year Treasury yield is under 2.0%. In other words, there would be a lot of money chasing that yield, which would push the valuation higher (and the yield back down).
Thus, looking at it from the dividend perspective, a value of around $1.5 trillion for Aramco seems to be in the right ballpark when compared to Western oil companies.