Why Saudi Aramco Should Trade at a Discount to Exxon
Mobil -- Barrons.com
2019-11-13 15:26:49.92 GMT
By Avi Salzman
Saudi Aramco is expected to start trading in December on the Tadawul, a
small Saudi stock exchange. The state-controlled oil-and-gas company is
expected to be the largest publicly traded company ever, with a valuation of
over $1 trillion. But for investors looking to grab a piece of the offering --
and it will only be open to institutions with more than $500 million in assets
-- it's still not entirely clear how to value it.
Investors tend to use comparable companies, or "comps," to determine
how
to value a new offering. It's easier to track a new company's value if you can
compare its attributes to something that already has a market value.
Saudi Arabia clearly wants its stock to trade like a Western oil major --
such as Exxon Mobil (ticker: XOM), Chevron (CVX), BP (BP), Total (TOT), and
Royal Dutch Shell (RDSA). Those stocks trade at an average valuation of 12.6
times expected 2020 earnings. Major oil companies in emerging market countries
tend to trade at a substantial discount -- currently 7.8 times earnings --
Bernstein analysts Neil Beveridge and Oswald Clint note in a report on
Wednesday.
"Emerging market oil majors trade at a 30-40% discount to developed market
oil majors on most valuation metrics despite having comparable performance
metrics (returns, reserves, production growth and operating margins),"
they
wrote. "We believe this discount reflects country risk and government
ownership
which can often lead to misalignment between minority interests and
management."
The Bernstein analysts argue that the Saudi government does have a case
for a premium valuation, largely because it has the most reserves in the world
by far and the lowest cost of accessing those reserves. This would result in
better pricing on a price-to-book or price-to-cash-flow basis. It has enormous
assets and strong margins that should result in strong cash flow.
But the company also has several limitations. Its earnings are expected to
grow at a compound annual growth rate of just 1% a year for the next three
years, a discount to Western oil majors, the analysts note. And the fact that
it's government-controlled should be a serious concern for investors.
"This will have an impact on future production policy and appointment of
key directors and management personnel," Beveridge and Clint wrote.
"While
Aramco does little national service today, this could change in the future
given how important Aramco is to the Saudi economy."
The company's attributes and drawbacks mean it should trade at a premium
to emerging market competitors but a discount to Western oil companies, they
argue.
"On balance we believe that it is not justified for Aramco to trade at a
premium to western oil majors, although it should probably trade at a premium
to other emerging market oil majors given the quality of the asset base,"
they
wrote. "In this case a 6-7% dividend yield is not unreasonable, in our
view."
Write to Avi Salzman at avi.salzman@barrons.com
(END) Dow Jones Newswires
November 13, 2019 10:26 ET (15:26 GMT)
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