Saudi Aramco’s IPO comes at a time of decline for the oil industry, although the company is likely to be more long-lived than many of its competitors, according to Colin Croft, emerging markets fund manager at Jupiter Asset Management.
Responding to questions from Arabian Business, Croft said that the “overall picture of the oil industry is one of mid-term decline” even as analysts may be trying to value Aramco at between $1.2 and $2.3 trillion.
“The only question is how many decades are left before climate concerns and cost competition force the transition towards more sustainable transport systems,” Croft said.
“Although Aramco’s low cost base and vast reserves ought to give it far more longevity than other oil companies, I would not be keen to pay too much of a premium for it given the uncertainty regarding how much of these reserves will have to be left in the ground,” he added.
Russian comparison
Additionally, Croft said that the company can best be compared to Russian-state owned oil companies, which also have considerable reserves and low costs, but benefit from a freely floating local currency and reputation in the market.
“These [firms] currently offer dividend yields of closer to 6.5 percent,” he said. “If Aramco were to trade on a similar level, then its valuation would be closer to $1.2 trillion than to $2.3 trillion.”
However, Croft said that a valuation of between $1.6 and $1.8 trillion is likely still achievable, given the small proposed size of the free float and likely composition of its investor base.
“Saudi Aramco is no different from other oil companies in that its appeal would lie in its ability to supply regular dividend payouts to shareholders,” he added.
“Without an attractive dividend policy, it would be impossible for the firm to achieve a valuation anywhere near the current level.
“Oil is an industry where investors increasingly expect companies to focus on returning capital to shareholders via dividends rather than reinvesting in output growth.”
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