What's the Value of Saudi Aramco?

 

Takeaway

If Saudi Armaco privatized 10% of the company on public market, it would probably bring in substantially less than FT's estimate of $700 billion.

(For the latest on this topic, see "More Thoughts on the Value of Saudi Aramco".)

In the Financial Times last Friday the claim was made (FT subscription required) that Saudi Aramco has a value of close to $7 trillion, which would make it more than 20 times as valuable as ExxonMobil, the largest U.S. company, and about one-third the size of the entire U.S. stock market. This is incredible – the question is whether or not it is true.

Determining the hypothetical market capitalization of Saudi Aramco is somewhat difficult because it is completely state-owned, and thus has expenditures that may not be related to its profit-making mission. So to put a bit of structure on this problem, let’s do the following thought experiment: Suppose that Saudi Aramco does what Petrobras, the Brazilian national oil company, did in the late 1990s when it was partially privatized and sold about half of its shares on the public markets. The Petrobras experiment was tremendously successful; Saudi Aramco as a company, and the Saudi Arabian economy, would probably benefit from a partial privatization of Saudi Aramco. Unfortunately, I don’t see this happening any time in the near future.

Major Oil Companies and Their Market Cap and Oil Reserves

 Market CapitalizationProven Reserves (BOE)ExxonMobil$306 B22.8 BPetrochina $350 B20.5 BBP$166 B18.0 BShell$160 B11.9 BChevron$143 B11.9 BPetrobras$200 B14.8 B 

The question I have is the following--let’s suppose that Saudi Aramco partially privatizes, sells off 10% of the company on the public markets, and starts to run the company like a private company like Petrobras did. What do you think that 10% stake would be worth? The Financial Times is suggesting that the stake would be worth $700 Billion. I think it would be worth substantially less.

What do you think?

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services, McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

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