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Saudi Arabia's final attempt to increase Aramco's valuation



Saudi Arabia settles for the Aramco IPO and highlights all stops to increase the company's valuation. But it is a desperate attempt that is full of risk.

Saudi Arabia is reportedly bullying the ultra-rich in the country for investing its money in the offering, a press campaign that has echoed the Rak-Carlton shakedown 2017. [19659002] Aramco also dangles the possibility of dividend payments greater than advertised to investors . "Aramco management has emphasized the possibility of further distributions to shareholders beyond the minimum dividend," said Bank of America Merrill Lynch in a report for investors seen by the Financial Times. Higher dividends will be made possible by borrowing, while the performance is also linked to some optimistic assumptions about higher oil prices and a steady increase in free cash flow.

But big banks are still not coming to Aramco, putting valuation areas on companies well below the $ 2 trillion figure that Crown Prince Mohammed bin Salman wants. "These are marketing materials," a banker told FT, referring to the optimistic assumptions that Aramco is treading on future oil prices.

Bank of America, for example, says the company could be worth between $ 1

.2 and $ 2.3 trillion, which, to be fair, will still yield a staggering number, even though the range the bank offered is nebulously large. Related: How Much Oil Is There to Take in Syria?

Some press releases suggest that MbS has come to the idea of ​​a lower valuation, perhaps in the region of $ 1.7 trillion. But again, even the revised number may be too optimistic. The danger is that the stock exchange is flopping and the stock price is slipping, burning investors along the way. China may invest $ 5 to $ 10 billion in the company, but from China's perspective, the investment will undoubtedly serve geopolitical goals as much or more than any financial result.

Ultimately, there are big questions about Aramco's unique nature, huge profits despite. The Abqaiq attack highlighted geopolitical risks to the company's operations, revealing that a significant portion of the country's assets could be knocked out overnight by an unexpected attack. This must certainly be included in the valuation of the company.

Meanwhile, Aramco may make promises to investors, but at the end of the day, the company and its shareholders would be completely surrendered to the King and his political goals, leaving little or no legal application for investors.

“For example, it is using large to expand production capacity to maintain Saudi Arabia's status as the world's only real swing producer, sensible from a political point of view; but for shareholders, it makes little sense to spend money on available capacity that can never be used, ”wrote Torbjorn Soltvedt, principle MENA analysts at Verisk Maplecroft.

For the IPO to succeed, MbS may need to lower its sights even further. "A successful IPO is one that makes money for investors, not the one with the highest valuation," Slava Breusov, senior analyst at Alliance Bernstein, told Bloomberg. Breusov added that Aramco is worth "well under $ 1.5 trillion." Pulling off a high valuation stock exchange listing, but following that track is risky. “So far, MBS has very few policy gains under its belt. And on the other side of the ledger there are several clear failures: death in Yemen, a halted Vision 2030 reform program, and the September 2019 attacks against the heart of Saudi Arabia's energy infrastructure, "said Torbjorn Soltvedt of Verisk Maplecroft. "Achieving a nominal value of $ 2 trillion through strong arm tactics will be a hollow victory if it reinforces the existing concern for governance and the rule of law."

Meanwhile, Saudi Arabia offers Aramco within days of the OPEC + summit in Vienna, complicating both events. The valuation of Aramco is influenced by oil prices, and Riyadh's strategy in Vienna at this time is strongly influenced by the desire for a successful listing of Aramco.

Nevertheless, press releases at this stage suggest that OPEC + is likely to roll over the cuts rather than elaborate on them, which makes some sense. Aramco may benefit from higher prices stemming from a deeper cut, but it will also highlight the political nature of the company's decision making.

MbS runs a lot on the IPO and there is no shortage of risk and land mines in the way. But one of the few things that is certain is that the valuation will come under his eyesight. "[D] highlights a wide range of measures to increase Aramco's valuation; it will probably be the $ 2 trillion target out of reach," concluded Soltvedt of Verisk Maplecroft.

By Nick Cunningham of Oilprice.com

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