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Saudi Aramco over-valued by $300bn, say analysts

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Saudi Aramco IPO is expected to make the company most valuable in the world. Photo: Hamad I Mohammed/Reuters

Saudi Arabia’s state oil company is worth just $1.4 trillion (£1.06tn), analysts said Monday, well below the $2tn the Middle Eastern state once hoped to reach on the public market.

Analysts at US financial services giant Morningstar initiated coverage of Saudi Aramco on Monday, saying the “fair value” of the business is $1.4tn.

While it still makes Saudi Aramco the world’s most valuable listed company — surpassing Apple’s $1.2tn valuation — the “fair value” figure is $300bn below the $1.7bn valuation Saudi Aramco is targeting in its upcoming initial public offering (IPO). It is also well short of the $2tn Saudi Crown Prince Mohammed bin Salman has long sought for the business.

“Our valuation fails to reach the rumoured targeted valuation of $2 trillion,” analysts Allen Good and Marloes Spanjersberg wrote in a note sent to clients on Monday.

Prince Mohammed bin Salman said in 2016 he hoped to float about 5% of Aramco via a local and international listing as part of plans to diversify the economy away from its reliance on oil. At the time it was reported he was seeking a $2tn valuation.

READ MORE: Saudi Aramco stock market listing to be the biggest in history

Good and Spanjersberg wrote: “To get to that level, we'd need to assume midcycle oil prices of $100, assuming all else equal in our model, well above our $60/bbl estimate.”

Oil (CL=F) currently trades at $59 per barrel. Last week OPEC agreed to cut production by 50,000 barrels per day in the first quarter of 2020, which should push up prices. Saudi Arabia’s energy minister Prince Abdulaziz bin Salman — the half-brother of the crown prince — denied the cut was linked to the Saudi Aramco float in an interview with CNBC.

Saudi Aramco has the exclusive rights to produce nearly all of Saudi Arabia’s vast oil reserves and Good and Spanjersberg said this “uniqueness” makes the company difficult to compare to peers.

“Our model already incorporates rather favourable assumptions,” Good and Spanjersberg wrote.

The Morningstar verdict adds to the long list of issues that have dogged Saudi Aramco’s listing process. The IPO dragged as banks struggled to drum up interest in the business at the targeted $2tn and earlier this year Saudi Arabia abandoned plans for an international listing. Saudi Aramco will instead list on the local Tadawul stock exchange.

Aramco is set to begin trading on 11 December and is on track to raise $25.6bn, making it the biggest initial public offering in history.

Energy minister Prince Bin Salman said on Friday he believes Aramco will reach a $2tn valuation once listed.

“Aramco will be higher than the $2tn and they can bet this will happen,” he told Bloomberg.

READ MORE: Saudi Aramco sidelines big global banks in IPO process