2019-10-14 Bloomberg Businessweek-Europe Edition

 BUSINESS

15

PHOTOS:

BIN

SALMAN:

LUKE

MACGREGOR/BLOOMBERG.

OIL

FIELD:

SIMON

DAWSON/BLOOMBERG.

DATA:

EUROMONITOR

INTERNATIONAL

○ CrownPrince

Mohammed

thanthe$58 billionit paidtotheSaudigovernment

in2018.That’sequivalenttoabout$20foreverybar-

relit producesandmorethanthedividendspaidby

Exxon,RoyalDutchShell,andChevroncombined.

TheSaudigovernmentalsotweakedAramco’stax

structuretoallowmorescopeforshareholderpay-

ments,cuttingtheroyaltypaidoneverybarrelto

15%from20%aslongasoilpricesstaybelow$70a

barrel.(They'recurrentlybelow$60.)It evenprom-

isedminorityshareholdersthey'dbepaiddividends

beforethegovernmentif oilpricesweretocrash.

Evenso,ata valuationof$2 trillion,Aramco’sdiv-

idendyieldwillequaljust3.75%.That'sa healthy

returnina worldofzerointerestrates,butit’sless

thanholdersofthecompany’s30-yearbondareget-

ting.Today,Exxon’sdividendyieldis about5%.For

AramcotomatchExxon’syield,itsmarketvalue

wouldhavetobecloserto$1.5 trillion.

Anotherconcernforpotentialinvestorsis the

outlookfordemand.Aramcowasbuiltinanera

whenoildemandwouldreliablyriseyearafteryear

ashundredsofmillionstooktotheroad.Butglobal

automakerssuchasVolkswagenAGareinvestingbil-

lionsinelectricvehicles,andsomeanalystsexpect

gasolinedemandtopeakwithinthenextdecade.

Moreimmediately,theInternationalEnergyAgency

seesa potentialmismatchbetweensupplyand

demandearlynextyearofmorethan1 millionbar-

relsa day.—WillKennedy,withSwethaGopinath

suggested. For one thing, there’s no plan to list in a

global financial center such as London, New York,

or Hong Kong. For now, the shares will trade only on

Riyadh’s stock exchange, the Tadawul.

A local listing will give the government significant

input into who buys the stock. The kingdom’s richest

families have been invited to become anchor share-

holders. It’s an offer they may find hard to refuse.

The offering will also be pushed to Saudi citizens

through a countrywide advertising blitz, with banks

encouraged to lend money so retail investors can

participate, according to people briefed on the plans

who asked not to be named before the details are

made public. And bankers on the deal are pitching

the offering to sovereign investors in Asia and the

Middle East, who may have long-term economic and

political reasons to cement strong ties with Riyadh.

But the world’s money managers may see rea-

sons to stand on the sidelines: a weak oil market,

concerns about the strength of the global economy,

and last month’s attack on Aramco’s most import-

ant crude-processing plant. Investors are already

demanding a premium to hold the country’s debt,

downgraded in October by Fitch Ratings Ltd.

“Aramco is simply the best oil and gas asset on

the planet,” says Danilo Onorino, who runs fund

manager Dogma Capital in Switzerland and has

invested in Aramco’s bonds. “But there are prob-

lems. Saudi Arabia’s cost of capital is relatively

high, the oil price isn’t where you want it to be,

and there are issues with transparency.”

Investors worry the IPO won’t bring indepen-

dence from the Saudi state, which has never sug-

gested selling more than a 5% stake. Aramco’s tax

payments and dividends will remain the biggest

source of government income, and Saudi Arabia is

the most important member of the OPEC cartel. So

oil production will remain a political decision.

“Aramco operates some of the lowest-cost assets

in the world,” says Rob Thummel, a senior portfolio

manager at Tortoise Capital Advisors. “The biggest

concern around Aramco is governance."

Valuation is another concern. The crown prince

has always insisted that Aramco is worth more than

$2 trillion, almost twice the market capitalization of

Microsoft Corp. and Apple Inc., the world’s most

valuable companies today. There’s little doubt the

company deserves a stratospheric valuation: It

pumps almost 10 million barrels a day, more than

double its largest American rival, Exxon Mobil

Corp., and posted an annual profit of $111 billion

last year. But $2 trillion still looks aggressive com-

pared with other major oil producers.

Aramco recently promised to pay a base dividend

of at least $75 billion in 2020, significantly higher

THE BOTTOM LINE The long-delayed IPO of Saudi Arabia’s

Aramco, which pumps 10% of global crude oil, may need to value

the company at less than the expected $2 trillion.

 A natural gas facility

in Aramco’s Shaybah

oil field