President Trump is well-known for preferring to cut out the middleman (the media) and going on Twitter to directly communicate his thoughts, ranging from showbiz to politics to business.
Investors who are interested in the world's biggest IPO -- that of Saudi Arabia's oil producer, Saudi Aramco -- have certainly seen these two tweets in the past three days:
Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!
— Donald J. Trump (@realDonaldTrump) November 4, 2017
And
I have great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing....
— Donald J. Trump (@realDonaldTrump) November 6, 2017
In remarks to reporters on his visit to Asia, quoted by the Financial Times, President Trump said last Saturday that he would like the Saudis to list a stake in Saudi Aramco either on the NYSE or the Nasdaq, and that King Salman bin Abdulaziz Al Saud, to whom he spoke a while ago, said he would consider it.
It is hard to put a value on Saudi Aramco, which is the world's largest energy company, because a lot of information about the company has not yet been made public. Media reports say Saudi Crown Prince Mohammed bin Salman has estimated the company at $2.0 trillion. However, looking strictly at its oil reserves, that figure could be even higher.
Aramco has oil reserves of around 260 billion barrels. Real Money's sister publication The Deal reported last month that New York's Hess Corp. (HES) agreed to sell its Norwegian oil assets to Aker BP ASA for $2.0 billion. Hess Norge's proven and probable reserves are 150 million barrels of oil equivalent, which means a valuation of about $13.33 a barrel. Assuming the same valuation, Saudi Aramco's oil reserves alone would be valued at $3.5 trillion. Of course, that is a theoretical value.
Aramco has not published financial data yet -- it will do so next year, if and when its initial public offering goes ahead. It has also not commented on speculation about its valuation, which is normal for any company preparing an IPO, because it does not want to get tied to a valuation so early in the process.
The plan is to list a minority stake on Saudi Arabia's domestic stock exchange, the Tadawul, and another on a bigger, international exchange.
The London Stock Exchange started to roll out the red carpet last spring, when Prime Minister Theresa May visited Saudi Arabia. In July, the Financial Conduct Authority (FCA) suggested creating a new category within its "premium" listing that would exempt some state-controlled companies from certain rules. Critics have slammed the proposals as a weakening of rules that is tailored specifically to attract the Aramco listing.
So, if the big stock exchanges vie to get some of the huge pie that is Saudi Aramco, should the retail investor jump at the shares when they are listed? Before they do, retail investors should be taking into account two things.
The first is that the fabulous valuation figures should be matched by equally fabulous earnings. Enterprise value to EBITDA (earnings before interest, tax, depreciation and amortization) for the world's second-largest oil company, China's Sinopec (SHI) , is around 10 on average over the past five years. For Exxon (XOM) , it is also around 10.
To match this EV/EBITDA ratio, Saudi Aramco would have to post EBITDA of $350 billion for a valuation of $3.5 trillion, or $200 billion for a valuation of $2.0 trillion. That is a huge figure, even for a giant like Aramco. For comparison, Sinopec's EBITDA was $1.33 billion last year and Exxon's was $23.24 billion, according to FactSet data.
The second is the political situation in Saudi Arabia. As you may know, over the weekend Crown Prince Mohammed bin Salman ordered the arrest of around 60 princes, businessmen and ministers in an anti-corruption purge. While this may look like an attempt at cleaning up the country's act before the IPO, the swiftness of the move does raise questions about the Crown Prince's true intentions.
If the crown prince wants to amass power only for himself and rule with an iron fist, what will happen with the revenues of Aramco when it turns out the state, its biggest shareholder, needs some more cash for various pet projects? And more importantly, what can minority shareholders expect from a majority shareholder that is so unpredictable?
By all means, anticipate the Saudi Aramco IPO with excitement, trepidation even. But use your judgment before jumping in.
