Saudi Arabian oil companies are in a league of their own

Take its oil reserves — roughly 260 billion barrels, nearly 10 times those of the global ultra-major Exxon Mobi. Or its daily production — 10 million barrels, more than the domestic output of every US oil company combined. Which is why the mere suggestion that this state-owned oil giant might go public seems so outlandish.

Would the Kingdom of Oil really place its crown jewel in the hands of fickle investors? The answer, according to the kingdom’s deputy crown prince, is maybe. In an interview published Thursday, Mohammed bin Salman said Saudi Aramco was considering an IPO as the kingdom confronts the hard economic and geopolitical realities of cheaper and cheaper crude.

It’s impossible to overstate the power Aramco wields in Saudi Arabia and the global oil market. The company traces its origins back to the oil shortages of World War I and is deeply intertwined with the rise of one of the most powerful forces of the past half century: the modern petro state. What is that worth? “Trillions of dollars,” according to The Economist, which first reported the prince’s comments.

That would easily rank Aramco among the world’s most valuable companies, well above Apple, at $600 billion. Based simply on its oil reserves and using a conservative valuation of roughly $10 per barrel, Aramco could be worth more than $2.5 trillion.

And yet stock market investors rarely value state-owned oil companies as dispassionately as the numbers suggest – or as government officials might hope. Should Aramco go public, it might actually fetch as little as $100 billion, based on valuations applied to similar state-owned groups.

Political risk

State-owned groups usually fetch lower valuations. The reasons? One is political risk, real or perceived. Investors often worry governments will put their interests ahead of shareholders. Others are a lack of transparency and, in some cases, corruption.

In the case of Saudi Arabia, Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a former senior oil official at the White House, said that some people have “raised questions about the true size” of Saudi Aramco’s oil reserves.

The kingdom has never published an audit of the reserves. Most details about the size of its giant fields remain secret. What’s more, “Aramco has obligations beyond producing just oil that other publicly listed companies do not have, such as, for example, running a good part of the healthcare system,” Bordoff said.

Enthusiastic about IPO

Prince Mohammed told The Economist he was “enthusiastic” about a potential stock offering. “This is something that is being reviewed, and we believe a decision will be made over the next few months,” the prince was quoted as saying, adding that an IPO would bring “transparency” to Aramco.