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Will World Record Profit For Next Year's IPO Be Delivered By Aramco?

Will World Record Profit For Next Year's IPO Be Delivered By Aramco?
Oil giant Saudi Aramco must either surprise investors with world record profits or reduce its aspirations for a $2 trillion valuation in its initial public offering (IPO) when it discloses its financials for the first time next year.
Saudi Crown Prince Mohammed bin Salman wants to raise cash through the IPO to finance investments aimed at helping wean the world’s biggest oil exporting nation off dependency on crude and investors have long debated whether Aramco could be valued anywhere close to $2 trillion, the figure suggested by him.
Aramco warrants close to the $2 trillion valuation  - in line with recent industry acquisitions - such as Total’s purchase of Maersk’s oil assets, based on Aramco’s oil reserves of 261 billion barrels and a valuation of $7 to $8 per barrel.
But that is not the only metric for an energy firm’s worth. Aramco’s target valuation may be challenging by other measures, until Aramco publishes financial results before the planned IPO in 2018, most other metrics for the world’s largest oil producing company will not be disclosed and which are simply not known.
The Saudi firm has to report EBITDA in the region of $130 billion to achieve a $2 trillion valuation – based on a simple calculation using globally accepted ratios for Aramco’s peers - enterprise value versus core earnings (EV/EBITDA).
And such earnings before interest, tax, depreciation and amortization (EBITDA) of above $100 billion has not been reported by any ever firm in any industry and  therefore such an EBITDA figure would be a global first.
In comparison, according to Thomson Reuters Eikon data, EBITDA of $82 billion was reported in 2015 by Apple, the technology giant and the world’s most valuable listed firm that is worth more than $830 billion.
And according to Thomson Reuters Eikon data, EBITDA of $23 billion was reported last year by Exxon Mobil, the world’s largest listed energy firm with a market capitalization of $365 billion in 2016.
When asked to comment on how it would achieve the $2 trillion figure, Aramco was not to be drawn into the subject.
“This is highly speculative. We do not comment on speculation or rumor,” the company said in a statement.
Until the completion of book-building to assess investor appetite, Aramco’s value could not be calculated, a Saudi Arabia-based industry source said.
Exxon does not have even a 10th of Aramco’s reserves and has less than half the Saudi firm’s oil output and therefore it was misleading to compare Aramco with Exxon, the source said. And therefore, the source claimed that EBITDA should not be the only measure.
Nevertheless, securing Exxon’s high ratios would augur well for Aramco. Handing it ratios that are sometimes more generous than popular technology firms such as Google and Apple, investors tend to like Exxon more than other oil firms.
“One thing you never do ahead of an IPO is to tell the market how much the company will be worth as you immediately become hostage to a number or a timetable,” said a Western investment banker, who was involved in listing another state energy firm.

Christopher J. Mitchell

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