Could Saudi Arabia Cancel Aramco’s IPO?

As oil prices decline, the lead underwriters of Saudi Aramco’s initial public offering (IPO) must be wondering if the Saudi government will change its mind about privatizing the company in 2018.

U.S. crude fell again on Thursday, settling at $49.28 per barrel, lowest close since November.

Fitch Ratings revised their WTI crude oil price forecasts lower by $2.50 per barrel this month to average $52.50 in 2018.

The company also has a “stress case” price of $40 per barrel in 2018.

The Saudi government estimates Aramco’s value at approximately $2 trillion using a formula of 261-266 billion barrels of oil reserves multiplied by $8 per barrel.

Others such as Wood MacKenzie, an independent oil consultant, estimate the value closer to $400 billion using an undisclosed valuation method.

The problem with the Saudi’s valuation method is that it doesn’t work for other oil companies around the world.

Bloomberg analysts pointed out that if the same measure was applied to Russia’s largest state-owned oil company Rosneft (MCX:ROSN), it would be valued more than 4 times higher than its current market value, while ExxonMobil (XOM) would be worth half as much as its current market value.

Saudi announced its intention to IPO Aramco in early 2016 when oil prices were at their lowest level since the 2009 financial crisis. The drop in oil prices caused the country’s public finances to come under severe strain. At the time, this caused Standard & Poor’s to predict the country’s debt would reach $174.3 billion by 2018.

Selling a 5% stake in Aramco would have netted the country $100 billion using the $2 trillion valuation figure, greatly helping to plug the budget gap. If the number is closer to Wood MacKenzie’s estimates, the government would only come up with about $20 billion.

But the Saudis are probably not willing to sell Aramco at anything less than a high price. Although no exact figure has ever been reported, it seems reasonable to assume that the government may have second thoughts about selling off such a prized asset if oil falls below $40 per barrel on a sustained basis.

The logic being that enthusiasm for the IPO grew as oil trended toward $60 per barrel. If the trend is now going the other way, banks may find that the Saudi government is willing to wait for a higher oil price and better time to sell.

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