Higher dividend, lower valuation needed at Aramco


The Saudi oil group is proving a tough sell, to the discomfort of bankers hoping to please ruler Mohammed bin Salman with a $US2 trillion valuation.

The Lex Column

Amazon, Alibaba, Alphabet, and Saudi Aramco? Saudi Arabia’s state oil company has ranked itself alongside US tech giants in a presentation promoting its initial public offering.

Such flourishes have failed to excite western fund managers. Saudi Aramco’s intermediary army of 17 foreign investment banks is scrabbling to fill meeting slots. A mooted minimum annual dividend of $US75 billion ($109.5 billion) reflects the strain.

Even Japanese refiners, heavy purchasers of Saudi Arabian crude oil, have no interest in investing. So said the boss of its largest Japanese partner JXTG on Friday. Saudi Aramco is proving a tough sell, to the discomfort of bankers hoping to please ruler Mohammed bin Salman with a $2tn valuation.

Saudi Aramco rightly argues that its profitability is way ahead of large international oil companies, such as ExxonMobil or BP. Even so, Bank of America has suggested Saudi Aramco might need to increase that $US75b dividend using debt.

No wonder. At $US2trn, the yield would be 3.75 per cent. That is not enough. The yield from the largest 15 oil producers have trended upward for a decade to 6 per cent, notes Bernstein. Either the payout goes up or the valuation must pull back.

Lex thinks a $US1.2trn capitalisation makes sense. The prince has been lowering his sights, but probably not that much.

The company could allocate preferential dividends to the sliver of 1-3 per cent of equity to be sold publicly. The cosmetic boost to the wider valuation would fool no one, however.

Should a company that claims such fantastic capital returns (at June, 36 per cent on capital employed) allocate so much of it to dividends, anyway? The business should perhaps be investing in its own operations instead.

When Warren Buffett, a fan of value investments, bought into PetroChina in the early 2000s, it looked cheap at 6 times earnings. The Saudis are targeting twice that for Saudi Aramco, on an exchange unfamiliar to most portfolio managers.

They may well get this by badgering local billionaires and friendly wealth funds. But the effort to achieve numbers acceptable to the prince are assuming a desperate air.

Financial Times

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