Reality check for Aramco’s $2tr vision

Saudi Arabia has said oil giant Saudi Aramco is worth more than $2 trillion (Dh7.34 trillion), enough to consume Apple Inc twice, and still have room for Google parent Alphabet Inc.

Industry executives, analysts and investors told Bloomberg their analysis — based on oil reserves and cash flow projections under different tax scenarios — suggests Aramco is worth no more than half, and maybe as little as a fifth, of that amount. This means Saudi Arabia would earn a fraction of the $100 billion implied by its valuation if it sells 5 per cent to the public in 2018, as planned.

For example, Wood Mackenzie Ltd came up with a rough valuation of Aramco’s core business of $400 billion, according to clients who attended a private meeting at the oil consultant’s City of London office this month and asked not to be named. The Edinburghbased company, popular for its analysis and valuation of energy companies and assets, declined to comment.

An Aramco spokesperson said the oil producer doesn’t comment on rumours or speculation.

While there’s a lot of guesswork involved in sizing up a company that’s never divulged financial statements and may have its tax rate cut before the initial public offering, this valuation gap reveals the hurdles Saudi Arabia could face in preparing for the post-oil era.

A profitable IPO is meant to anchor a sovereign wealth fund that will, if things unfold as envisioned, generate enough investment income at home and abroad to dominate state revenue by 2030. Demand for oil will peak just before then, according to Royal Dutch Shell Plc projections, as alternative fuels and electric cars gain popularity, putting Middle East energy producers on shakier footing.

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas.