How much is 5% of Saudi Aramco based on DCF Model?(perchingtree.com)
perchingtree.com
How much is 5% of Saudi Aramco based on DCF Model?
https://www.perchingtree.com/saudi-aramco-pre-ipo-valuation-discounted-cashflow-model/2/
48 comments
Just what the world needs right now, an IPO that will generate a lot of funds back to SA to cover their deficits/debts - some of which inevitably goes to financing terrorism.
Their vision 2030 plan is actually an attempt to strike at the root cause of terrorism and religious extremism: economic disparity.
But you've probably never heard of their 2030 vision plan because it is never really reported on, and it looks like you're just repeating talking points, so good luck.
But you've probably never heard of their 2030 vision plan because it is never really reported on, and it looks like you're just repeating talking points, so good luck.
I haven't heard about vision 2030 but the quote as posted makes it sound like the root of the problem was that SA is poor and the people suffer "economic disparity". If only they were't so cash strapped all this time...
So, whose economic disparity are we talking about and why couldn't the trillions generated from sale of oil do anything about it?
So, whose economic disparity are we talking about and why couldn't the trillions generated from sale of oil do anything about it?
Those trillions were gone to save Saud House.
Confessions of an Economic Hit Man - John Perkins
Confessions of an Economic Hit Man - John Perkins
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How bout you go read about their vision 2030 plan before judging the whole thing on my poorly worded anonymous internet comment? It's a pretty big change to the structure of their entire society.
How about you link what you're referring to, from an official or reputable source?
I'll believe the Sauds aren't trying to further their continued power when I see it.
Here is the link to Vision 2030, but no mention of anything
http://vision2030.gov.sa/en
http://vision2030.gov.sa/en
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Word your comments better.
I mean OBL was a wealthy man, but that didn't stop him from going down the path of terrorism and religious extremism
This is purely speculation, but judging by how gun-ho they were about OPEC production cuts, they may have much less oil than widely believed. It could be they would have needed to cut production anyway since the wells are aging, and they're just making the best of it.
"Industry executives, analysts and investors told Bloomberg their analysis -- based on oil reserves and cash flow projections under different tax scenarios -- suggests Aramco is worth no more than half, and maybe as little as a fifth, of that amount [$2 trillion]. This means Saudi Arabia would earn a fraction of the $100 billion implied by its valuation if it sells 5 percent to the public in 2018, as planned."
https://www.bloomberg.com/news/articles/2017-02-23/saudi-ara...
https://www.bloomberg.com/news/articles/2017-02-23/saudi-ara...
Whether or not that is true, what they're doing is diversification. Selling off some of the oil assets long before they're depleted to invest in assets that won't be depleted. Speculation like yours determines the length of the runway, but it's clear to everyone that it will end probably in 50-100 years. In order not to collapse in what would be a global catastrophe, SA must do things exactly like this to survive.
Would you invest in an asset class that is only expected to decline in value going forward?
Depends on whether I get a price better than my assessment of the asset's present value.
Granted, if you can get a discount at acquisition, it might make sense.
No such thing in an efficient market.
That's true only if you believe in efficient markets. There is significant evidence that they are not. (Google "EMH disproved" and pick whichever reference you'd like)
Depends on how strong you like your Efficient Market Hypotheses. The strongest version "markets know the future" is obviously wrong. The weaker version that say something like "it's really hard work to beat the market" are obviously right.
I invite anyone who disputes the weaker versions to go and make a fortune in trading. All the "EMH disproved" nonsense is mostly that: nonsense.
I invite anyone who disputes the weaker versions to go and make a fortune in trading. All the "EMH disproved" nonsense is mostly that: nonsense.
What is the market cap of the largest horse buggy-whip manufacturer these days? The largest automotive manufacturer?
I don't think that term means what you think it means.
I don't think that term means what you think it means.
> Efficient-market hypothesis (EMH) is a theory in financial economics that states that an asset's prices fully reflect all available information.
(https://en.wikipedia.org/wiki/Efficient-market_hypothesis)
So, if buggy-whip manufacturing is really such a terrible business that everyone can tell will go under in a few years, their shares will already trade low.
For today's care manufacturers, the jury is still out and they can still pay quite a few dividends even when in decline. Hence their reasonable non-zero share price.
> I don't think that term means what you think it means.
Please re-evaluate.
(https://en.wikipedia.org/wiki/Efficient-market_hypothesis)
So, if buggy-whip manufacturing is really such a terrible business that everyone can tell will go under in a few years, their shares will already trade low.
For today's care manufacturers, the jury is still out and they can still pay quite a few dividends even when in decline. Hence their reasonable non-zero share price.
> I don't think that term means what you think it means.
Please re-evaluate.
They have plenty of oil. And more is found every day.
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Undoubtedly, they do have plenty of oil and may find more. The political risks and uncertainty around that region is the big problem really. Middle East has so far been stable (atleast the GCC). With Qatar problem, it makes the investors nervous.
It's not about quantity, it's about value and cost through time.
I think a fair point to add is the fact that Saudi's probably misspoke before the IPO leading to this piercing analysis from various analysts. Perhaps they know that the price is way less than 2 Trillion Dollars and will be happy with it. As someone has already mentioned, there are other risks that need to be considered (some of which the analysis covers)
- Dividend, Taxes and Royalty Whack a Mole - Reduce Dividends, it increases the valuation but, pay back more dividends in the 2nd year back to the majority shareholders. It throws the yearly cash flows into a spin. Investors may start offloading the stock.
- Political Risks i.e a major coup where the royal family is deposed and another government installed.
- Governance Risks - What if Minority Shareholders have no say and no power. What if Assets cannot be seized ?
Add these risks and discount factor should be way higher like 30-40%.
What say ?
- Dividend, Taxes and Royalty Whack a Mole - Reduce Dividends, it increases the valuation but, pay back more dividends in the 2nd year back to the majority shareholders. It throws the yearly cash flows into a spin. Investors may start offloading the stock.
- Political Risks i.e a major coup where the royal family is deposed and another government installed.
- Governance Risks - What if Minority Shareholders have no say and no power. What if Assets cannot be seized ?
Add these risks and discount factor should be way higher like 30-40%.
What say ?
Why an IPO now?
Saudi Arabia sees a future, not too far off, where there is a sudden drop in demand for oil. Caused by electric cars.
In the US, 51% of oil becomes gasoline. https://www.quora.com/How-much-of-the-oil-production-is-cons...
A DCF model that does not take into account the rise of electric vehicles misses a very important point.
The IPO puts money in their pockets NOW based on future predicted profits. That money can be invested into true future technologies: EVs, clean energy, etc.
Why the IPO now? The rise of Tesla and BYD maybe? It's still a time when those are mostly unproven and so there are still plenty of skeptics and climate denialists who will buy up Aramco shares.
Saudi Arabia sees a future, not too far off, where there is a sudden drop in demand for oil. Caused by electric cars.
In the US, 51% of oil becomes gasoline. https://www.quora.com/How-much-of-the-oil-production-is-cons...
A DCF model that does not take into account the rise of electric vehicles misses a very important point.
The IPO puts money in their pockets NOW based on future predicted profits. That money can be invested into true future technologies: EVs, clean energy, etc.
Why the IPO now? The rise of Tesla and BYD maybe? It's still a time when those are mostly unproven and so there are still plenty of skeptics and climate denialists who will buy up Aramco shares.
It's a lot simpler than that actually; there's just a need for money in the short-term. I can nearly guarantee that this has nothing to do with fears of electric cars or any disruptive tech.
The Saudi sovereign wealth fund and other assets have been heavily liquidated and depleted to defray the costs of recent economic pressures, like the gambit against shale oil a couple years ago and the ongoing war costs. The IPO is only one facet; there are new taxes and some austerity measures concerning public sector employees that heavily slashed household incomes for a while, though some of the latter have been reversed recently when cashflow got better.
The IPO would would help replenish the sovereign wealth fund and cash reserves, and to help reinstate funding for some public projects that got affected by the downturn (massive nuclear energy projects and public transport infrastructure, for example)
The Saudi sovereign wealth fund and other assets have been heavily liquidated and depleted to defray the costs of recent economic pressures, like the gambit against shale oil a couple years ago and the ongoing war costs. The IPO is only one facet; there are new taxes and some austerity measures concerning public sector employees that heavily slashed household incomes for a while, though some of the latter have been reversed recently when cashflow got better.
The IPO would would help replenish the sovereign wealth fund and cash reserves, and to help reinstate funding for some public projects that got affected by the downturn (massive nuclear energy projects and public transport infrastructure, for example)
FYI, US is not the only country which have cars. Do not peg everything with whats in US. Its pure solipsism. The demand for oil will rise from developing nations in the near future. Rise of Tesla ? Everywhere else in the world, we havent heard of Tesla. If a company makes it big in the US market, it doesnt mean its a success everywhere else.
Any DCF model will not directly plug in assumptions. These assumptions impact the Discount Rate (r). Investors look at the same assumptions and may arrive at different Discount Rates.
And, also the fact that more oil would be found as the Artic starts cooling. Most of the Artic is with Russia, Norway and Canada.
Cars are only a small portion of oil use...
"Transport" is most of oil use. Admittedly that includes trucks, ships and planes.
http://www.globalpetrolprices.com/articles/39/
http://www.globalpetrolprices.com/articles/39/
The vast majority of which is trucks, ships and planes.
They already nationalized it once... They'll surely nationalize it again when they go broke.
Doesn't work that way. The 5% sale is used to finance an overseas sovereign wealth fund. If the shares were made void the overseas assets would be seized by creditors and then the credit rating of the entire country would crash. It's not the 1940s anymore.
They could get a us military 'guarantee' ;P
I think this is a nice piece, but would like to see some discounting for political risks. Saudi Arabia will retain a controlling interest in a firm that is strategically important for many reasons other than turning a profit:
* to provide tax revenues to the Saudi Government
* to provide cheap oil to the Saudi public
* to control the price of oil for political reasons -- e.g. if it wants to reward/punish other nations
* as a symbol of national sovereignty
Moreover, the Saudi Government is in a difficult position needing to placate some extreme forces and competing claims in their nation. It seems difficult to believe that this 5% share is going to prioritized when tough choices need to be made in the future.
That alone would, to me at least, call for a heavy discounting of future cash-flows.
* to provide tax revenues to the Saudi Government
* to provide cheap oil to the Saudi public
* to control the price of oil for political reasons -- e.g. if it wants to reward/punish other nations
* as a symbol of national sovereignty
Moreover, the Saudi Government is in a difficult position needing to placate some extreme forces and competing claims in their nation. It seems difficult to believe that this 5% share is going to prioritized when tough choices need to be made in the future.
That alone would, to me at least, call for a heavy discounting of future cash-flows.
By the way, I think he has most of what you have stated in it in another post. Just search for " Investor Risks associated with Saudi ARAMCO IPO" in Google.
https://goo.gl/QnT6gi
https://goo.gl/QnT6gi
Good point. What would you consider an appropriate Discount Rate in this case ?
For me, personally it would be in the ballpark of 50%. I just don't see this regime as being very trustworthy or serious about rolling back the trend of nationalization in the oil sector that has been the dominant feature of this ruling family.
I tend to kind of agree that a very high discount rate is appropriate, but, I do not see how Saudis will agree to even discussing 30% let alone 50% discount rate. They will rather quietly go to Institutional Investors Pre-IPO and allow them a major buy in share. There is no doubt that Saudis are unreliable and too many risks at play.
Haha so much for 3T. But I realize that it's not like this is anything but analysis.
Analysis is all that matters when it comes to the ipo. I'm sure there will be other analysis, but if no one believes it's as big as 3T, then the ipo is not going to raise what they want it to raise.
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