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Saudi Aramco's $2 Trillion Valuation Has Too Many Assumptions


29/03/2017
By:Bloomberg

Changing a tax system that has endured since the 1970s is no small matter, especially when it concerns what could be the world’s most valuable company. Saudi Arabia’s announcement on Monday that it was cutting the tax rate on large oil companies to 50 percent from 85 percent is crucial for the fate of the initial public offering of state oil giant Aramco. But is it enough to bridge the gap between a $2 trillion aspiration and independent estimates of $400 billion?

When the IPO was first publicly suggested in January 2016, a notional value of $2 trillion was given, and it has become important to justify a figure around this level. The problem is that this number, based on a simplistic multiple of the company’s reserves, overlooked two factors: Aramco’s high tax rate, and the long period over which reserves are expected to be produced.

The original tax rate of 85 percent was set back in the 1970s, when Aramco was still a consortium of U.S. majors: Exxon, Mobil, Chevron and Texaco. Nationalisation was completed in 1982. The company also pays a royalty on gross revenues of 20 percent, which has apparently not been affected by the latest reform.

 

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Last Update: 29/03/2017

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