Saudi Aramco IPO signifies opening of the Saudi economy in the context of finding alternative source of finance to reduce oil dependency.

1. Saudi Aramco IPO
A Catalyst to Saudi Arabian Economic Reform
Dr. T.P.Ghosh
Professor of Financial and Accounting
Institute of Management Technology, Dubai
Oil price slump, budget deficit and denationalization
Declining oil price during 2014-16 and price stabilization at little above $50 per barrel
continue to test the economic resilience of the Kingdom of Saudi Arabia challenging
growth and fiscal sustainability. As hydrocarbons account for about 80% of fiscal
revenues and more than 40% of GDP, Saudi Arabia remains vulnerable to subdued
prices1
. Saudi encountered budget deficit of $97.9 billion in 2015 which was contained
at $ 79 billion in 2016 and by the end of first half of 2017 the deficit has been further
slashed by 51%2
. So far the Government has adopted expenditure cut, reduction in
subsidies and sukuk issuance for fiscal consolidation. However, sale of 5% stake at
Government owned Saudi Aramco, the biggest energy company of the world, through
initial public offer is first ever attempt since oil slump to achieve multiple goals
including balancing budget deficit, controlling the rising level of national debt,
privatization of state-owned assets to achieve economic diversification. This article
argues that Saudi Aramco IPO is outcome of the vision and policy to contain rising
national debt level and finance non-oil diversification.
Figure 1 : Brent Crude Oil Price 5 Year Daily Chart
Budget Deficit and rising National Debt Level
Saudi enjoyed continuing budget surplus in the past ten years till 2013 with
Government spending level at 13% of GDP. While the downturn in oil revenue caused
a budget deficit of 2.3% in 2014 that was enlarged to 15% in 2015 and 17.3% in 2016.
Source : ww.macrotrends.net

2. Amidst the declining Saudi’s oil revenue and budget deficit, national debt level
continued to rise from just US$ 26.1 billion in 2015 to an estimated level of US$ 174.3
billion ( a rise by 567.82%: see Figure 2). The Debt to GDP ratio of Saudi has increased
from 4% in 2015 to 17.3% (estimated) in 2017. S&P downgraded Saudi Arabia from
AA- to A+ in October 2015 raising concern on ‘pronounced negative swing’ and then
to A- in February 2016 citing ‘likelihood of further drop in oil price would widen
Government deficit’. With the national debt projected to rise, the right option of the
Kingdom was to sell a small slice of 5% Saudi Aramco to public in IPO process3
although the IPO is part of a broader vision.
Source: S&P Rating Services, Money Morning Staff Research
The Saudi Aramco IPO is the outcome of Vision 2030 4
which aimed at reducing oil
dependency and transforming national economy. It is part of US$ 300 billion plan to
privatize assets held by Saudi Government. The Vision 2030 explains:
‘Diversifying our economy is vital. Although oil and gas are essential pillars of our
economy, we have begun expanding out investments into additional sectors.’
Saudi is flying a jumbo-size economy with only one engine [ oil] , and that just will not
fly. It needs to add more engines [ non-oil diversification beyond tax].
Saudi Aramco – Key Statistics
Saudi Aramco is world’s largest oil and gas company which was formed in 1933 with
the involvement of Standard Oil Company of California , now known as Chevron. It
was partly nationalized in 1950, and then fully taken over during 1980s on the wake of
movement in Saudi Arabia to nationalize natural resources. Aramco owns dozens of oil
fields, including the world’s largest onshore oilfield Ghawar and offshore oilfield in
Safaniya of Saudi Arabia. It also manages several gas fields as well as refining,
marketing and distribution operations all over the world. It has large number
subsidiaries and joint ventures operating domestically and abroad including US,
Europe, China and Egypt. Its biggest customers are US, China and India. Aramco’s
key activities are oil production, refining and petrochemicals. It also plans to open a
subsidiary in India to explore opportunities to take stakes in refining and petrochemical
projects. The company is served by about 60,000 employees.
26.1
57.2
112.8
174.3
0
20
40
60
80
100
120
140
160
180
200
2015 2016 2017 (E ) 2018 (E)
Figure 2 : Saudi National Debt in US$ Billion

3. RBS Research Bloomberg valued Saudi Aramco at US$ 2 trillion which is 5.7 times of
valuation Exxon Mobile on March 21, 2016. However, many analysts put much lower
valuation figure in the range of US$ 552-715 billion ( See Table 1). A critical r view is
that when the IPO was proposed in 2016 a notional valuation of US$ 2 trillion was
given based on a simplistic multiple of the company’s reserve4
. Wood Mackenzie , an
industry analyst firm, valued Aramco at US$ 400 million applying free cash flow
method at 10% discount rate. Of course, Banjamin Zycher explained that applying
discounted cash value approach the value of Aramco could be US$ 1.26 trillion at 10%
discount rate and it is worth od US$ 2.5 trillion at 5%5
. The Gurdian put a valuation of
Saudi Aramco at US$ 1 Trillion6
.
Table 1 Alternative Valuation of Aramco
Valuation method Valuation
( US$ Billion)
5% IPO Value
( US$ Billion)
DCF valuation based on
At 10% discount factor
715 35.75
Price /Revenue
(Peer P/R adjusted for Aramco’s cost
advantage =2.986 and 2016 revenue of US$
185 billion)
552 27.62
Source : Aramco - An Exercise in pre-IPO valuation , Prechingtree Solution;
https://www.perchingtree.com/saudi-aramco-ipo-biggest-market-game-changer-valuation/
Aramco’s financials are like a black box as being a private company it does not publish
financial statements. Experts exercised judgement and assumptions to arrive at
differing valuation. Presented below in Table 2 are key statistics of Saudi Aramco:
Table 1 Key Statistics of Aramco 2016
Total hydrocarbon production 13.5 million boepd
Crude oil produces 10.5 million bpd
Ethane produced 920 million scfd
Crude oil and condensed reserve 260.8 billion
barrels
Total raw gas processed 12.0 billion scfd
World wide refining capacity 5.4 million bpd
Gas reserves 298.7 trillion scf
Sales gas produced 8.3 billion scfd
Natural Gas Liquids produced 1.4 million bpd
Source : Facts and Figure 2016, www.saudiaramco.com
As a preparation of the IPO process, Aramco has planned to release historical financial
information in early 2018 in IFRS format. Moreover, Aramco’s role in financing
Government spending needs to be secluded and its contribution on account of royalty
and tax should be transparently decided. In effect US$ 2 trillion valuation is based on
too many assumptions including reeling back tax from 85% to 50% and transferring
certain liabilities to the Government.
Abbreviations
boepd – barrels of oil
equivalent per day
bpd – barrel per day
scfd – standard cubic feet per
day
scf standard cubic feet

4. The IPO
“ The IPO) will be used as a catalyst to signify an opening up like no other of the
Kingdom of Saudi Arabia, in terms of privatization, globalization and moving on and
building on the solid foundation that oil has provided our economy to the next
economy" - H.E. Eng. Khalid A. Al-Falih, Minister of Energy, Industry, and Mineral Resources;
Chairman of the Board of Directors of the Saudi Arabian Oil Company
https://www.cnbc.com/2017/10/05/saudi-aramco-ipo-schedule-is-not-slipping-says-
saudi-energy-minister.html
Reportedly, Saudi Government has taken various measures to unlock the value of the
energy giant:
 Untangling Aramco’s finances from those of state before 2018 by way of
shifting certain liabilities from Aramco to the state;
This includes historical debts from foreign Governments including Jordan and
Iraq to the State,
 To reduce corporate tax rate of Saudi Aramco from 85% to 50%;
This may be achieved through special tax deduction to compensate Aramco
for subsidised domestic energy sales.
 Dues from state entities like national airlines Saudia and domestic utility
Saudi Electricity are proposed to be shifter the State.
The biggest ever IPO of Saudi Aramco is proposed to follow dual listing, the Saudi
stock exchange and a selected international stock exchange, in the Second Quarter of
2018 . The IPO is expected to generate a fee of US$ 1 billion.
Although London and New York are the two favoured foreign exchanges but the
London Stock Exchange could lose the opportunity because of the listing rule of the
Financial Conduct Authority which currently requires a sovereign –controlled entity
to offer a minimum floating stock of 25%.
In any case, the Saudi Aramco IPO is expected to bring greater economic reform to
Saudi Arabian economy in its journey towards reducing oil dependency. Earlier H.E.
Khalid Al Falih, the energy minister of Saudi Arabia said in the sideline of World
Economic Forum that the IPO was more than just a symbolic statement of intent by the
Saudi government. The income from the IPO will allow the Public Investment Fund of
Saudi Arabia (PIF) to have more funds as it goes global, so [the IPO] is a key issue for
the transformation 7
.
References
1. World Bank, GCC: Economic Outlook- April 2017 ;
http://www.worldbank.org/en/country/gcc/publication/economic-outlook-
april-2017
2. Saudi budget deficit halves as financial reform kick in , Arab News, 6 October
2017; www.arabnews.com/node/1144106/saudi-arabia
3. The Saudi Arabia Debt Crisis in 2 Charts, Money Morning;
https://moneymorning.com/2016/03/22/the-saudi-arabia-debt-crisis-in-2-
charts/

5. 4. Robin Mills, Saudi Aramco’s $2 –trillion valuation a matter of accounting
tricks, The Globe & Mill Inc. ,
https://beta.theglobeandmill.com/report-on-business/rob-commentary/Saudi-
aramco
5. Benjamin Zycher, How much is Saudi Aramco worth? May 3 ,2017
www.aei.org/publication/how-much-is-saudi-aramco-worth/
6. Saudi Aramco: the key facts , 7 January 2017;
https://www.theguardian.com/business/2016/jan/07/saudi-aramco-the-key-
facts
7. Frank Kane, Saudi Aramco IPO is key to success of kingdom’s economic
transformation plans, says Al Falih ; 19 January 2017;
https://www.thenational.ae/business/saudi-aramco-ipo-is-key-to-success-of-
kingdom-s-economic-transformation-plans-says-al-falih-1.73302