By Paul Gregory, Professor, Department of Economics
Saudi Arabia plans a public offering of 5% of its national oil company, Aramco, sometime in 2018. As the world’s largest energy producer and with the largest proved reserves, Saudi Arabia believes that the capital market will value Aramco at some $2 trillion, making it the world’s most valuable publicly traded company. At this price, the government’s 5% would bring in $100 billion, which is supposed to be devoted to diversifying the Saudi Arabian economy away from energy.
In anticipation of the offering, the Saudi government has lowered taxes and royalties (previously 85% and 20%, respectively) on Aramco to make it more attractive to outside buyers. Saudi officials are currently weighing whether to list the privatized Aramco on the London or New York stock exchanges. A New York listing, with its more stringent disclosure requirements, would signal the Saudis’ intent to operate Aramco in a commercially responsible fashion.
The eventual valuation of Aramco is hotly disputed. The Saudis have thrown out a figure of $2 trillion. Analysts doubt this figure. Some put the valuation as low as $500 billion, which would mean a lean diversification fund of $25 billion.
Given the wide divergence of estimates of the upcoming market capitalization of Aramco, we can examine the determinants of value of publicly traded international energy companies to determine possible pricing ranges. My own analysis uses back-of-the-envelope statistical calculations, which show the possible determinants of market value and where Aramco might fit into this analysis.
My model (if we were to call it that) assumes that market capitalizations of major energy concerns depend on current production, proved reserves and the institutions – such as rule of law and strength of property rights – under which the company operates.
Figure 1 shows what Aramco’s value would be if we apply its production to the market cap per unit of production of the 17 international energy concerns in my sample. This production-based exercise yields Aramco market caps of between $885 billion, if it achieved Exxon’s market cap per unit of production, and $77 billion if it matched Russia’s Gazprom.