$1.4trn: How Far Apart Banks Are On Aramco IPO Valuation

Caught between a client seeking a $2 trillion valuation and skeptical foreign investors reluctant to pay anywhere near that amount, the banks working on Saudi Aramco’s initial public offering went for compromise: tell both sides they’re right.

The result risks pleasing nobody, however.

Aramco appointed more than 20 banks to advise on what could be world’s largest share sale, and their analysts - who are supposed to work independently of the investment bankers advising Aramco - put together reports on the company’s financial performance and outlook before the share sale kicked off. Consensus is in short supply.

Among 16 banks that offered a valuation, the range in estimates ran from $1.1 trillion at the bottom right up to $2.5 trillion, a number that even Saudi Crown Prince Mohammed bin Salman might find optimistic. The midpoint was $1.75 trillion, according to people who’ve reviewed all the research.

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The giant spread prompted incredulity among institutional investors and unhappiness in Saudi Arabia, where officials were surprised by the lower end of the valuation ranges, according to people familiar with matter.

The full $1.4 trillion range is more than the combined market capitalisation of the world’s six most valuable publicly traded oil and gas producers: Exxon Mobil Corp, Royal Dutch Shell, Chevron Corp, PetroChina, Total and BP.

France’s BNP Paribas did something different and had one number - a rather precise $1.424394 trillion. JPMorgan Chase & Co and UBS Group both wrote reports on Aramco, but declined to give valuation estimates to their clients, an unusual decision for a bank working on an IPO.

Aramco or RBC didn’t immediately respond to a request from comment. The other banks have previously declined to comment on the numbers.

What explains the huge spreads? Banks are caught between the expectations of the client and the realities of the global stock market.

Prince Mohammed has long insisted the state oil company is worth $2 trillion, although he’s prepared to scale back his expectations to between $1.6 trillion and $1.8 trillion, according to people familiar with the IPO.

The share price of Exxon Mobil, Shell and other publicly traded oil company tell a different story. Based on the dividend yield paid by Shell, for example, Aramco - which has promised to pay investors $75 billion next year - would be valued at closer to $1.25 billion.

“As a UK investor, I would view Aramco’s lower yield as a negative,” said Stephen Bailey, a fund manager at Liontrust. “We prefer Royal Dutch Shell, given that it has a better investment profile and has fewer geopolitical risks associated with its stock.”

To be sure, there are reasons why Aramco may yet attract a premium valuation. Even skeptics admit Aramco enjoys uniquely low costs. Perhaps more importantly, rich Saudi families are under intense political pressure to invest - the IPO is the centerpiece of Prince Mohammed’s economic reform program.

However, analysts at institutions not involved in the IPO are relatively downbeat. Sanford C Bernstein & Co, for example, said fair value is between $1.2 trillion to $1.5 trillion.

Palissy Advisors, a small natural resources specialist, said $1 trillion may be closer to the mark.