Countdownin the largest IPO of the World
Saudi Aramco, which is the largest oil producer globallyby providing 10% of the world oil supply, became the center of attention of the global business world with Prince Mohammed bin Salman’scommentson public offerings within the scope of "Vision 2030" in 2016. The oil giant, which plans to offer 1.5-2% of its market value to the publicon local stockExchange Tadawulwhich hasa market value of $ 505 billion.0.5% of its shares will be offeredto individual investors. Saudi Aramco aims to be offered to the public with a valuationof $ 1.7 trillion. While Saudi Aramco was the most profitable company in the world in 2018, it remained the world's most profitable company, leaving Apple ($ 31.5 billion) behind, with a net profit of $ 46.9 billion announced in the first half of 2019.
A Historical Look into Oil Prices between 2008-2019
When we compare Saudi Aramco's net profit for the first 6 months of 2019 with the first 6 months of 2018, we observe a 12% decrease. This situation can be explained by the oil prices, which remained low compared to the previous year, and the production figures, which were reduced with the OPEC decision.
As seen on the table above, while oil prices reached tothe heights of $ 132 in 2008, it decreased to $ 29 in 2016. Oil prices are the most important factor in the financial performance of companies that year. Indeed, in the next table, we can observe how oil prices affect the financial performance of BP, the global oil behemoth.
Oil Price Projections and Current Status
The projection regarding oil prices accordingto World Bank data, is given in the table below:
• As seen in the table below, America becomes competitive in the global oil market. This creates question marks on thefuture of oil prices. Although OPEC decreased its production by 1.2 mmb/ d in 2018 followingthe increased oil exports of America, it is not fully predicted how OPECwill react to this rapid increase in the following period and how these reactionswill affect the oil prices.
• Indeed, US made a statement last week that could put pressure on oil prices. According to the US Energy Information Administration (EIA) data; the US, world's largest crude oil producer, brokea newrecord in daily crude oil production with 12.8 million barrels in the week of November 2-8.
Mbpd: millionbarrelsperday Bscfd: billion standard cubic feet per day Mmscfd : millionstandard cubic feet per Mmboed: million barrels of oil equivalent per day
Saudi Aramco in Numbers
In 2018, Saudi Aramco proved that it needed less investment than its competitors
by investing an average of $ 4.7 per barrel of oil equivalent products. It is estimated thatAramcowillcomplete an investment of $ 35-40 billionuntilthe end of 2019. According to the published IPO prospectus, Aramco aims to invest $ 40-45 billion in 2021. In this atmosphere, where the oil prices are low, the company aims to continue its investments in accordance with its organic growth strategy, and accordingly, its investments are about 35% liquid products, 40% gas products and 25% downstream products.
Saudi Aramco Compared to its Competitors
Saudi Aramco made more net profits in the first 6 months of 2019 than the combined net profits of its 5 biggest competitors. Aramco produces about 10 million barrels a day and owns 13.3% of the world oil market. The cost per barrel is $ 2.80 and has the lowest cost per barrel compared to its competitors. With the advantage of low cost figures, Saudi Aramco produces about twice as much crude oil than its biggest rival, Exxon Mobil. Aramco produces 1.1 million barrels of liquid gas and 8.9 billion cubes of natural gas per day. Continuing its investments in the field of natural gas and NGL, when the capacity increase is completed Aramco will have the world's largest gas processing plant named «Hawiyah». The plant will have a capacity of 3.6 billion scfd following a 1.1 billion capacity increase.
Saudi Aramco Financial Valuation Model
• In the valuation shared above, the average oil price estimate stated on page 6 was used. Accordingly, the equityvalueof thefirms is $ 1.56 trillion. • Calculations usedwhilemaking revenue estimates arebased on the company’s market shares invarious productgroups and respectiverevenues generatedin theseproduct groups. This calculation is based on the fact that the company wants to reduce its reliance on crude oil revenues and, accordingly, aims to increase its shares in natural gas and petrochemical (downstream) products. • According to the published IPO prospectus, the corporate taxrateof the company will be 50%. However, downstreamproducts aresubjectto corporate tax at a lower rate of 20%. Revenueestimatecalculations were made accordingly. • The investment expenditures of the firm, which we mentioned as «Reinvestment», include the change in net working capital and depreciation. • «Sales / Capital»is an important metric and helps to calculate how much sales can be made with 1 unit of investment. Setting the rate too high causes the company to be overvalued and setting too low leads to undervaluation. The value taken here is slightly above the sector average of 1.18 and represents the average of the last 2 years.