Tax cuts lift Saudi Aramco valuation to $1.3 trillion, analyst says

Saudi Aramco, the world’s most valuable oil company, could become one trillion dollars “bigger,” following the hydrocarbon tax cut announced by the Saudi government.

Norwegian energy intelligence group Rystad Energy has lifted its Saudi Aramco valuation by about $1 trillion following the announced tax rate for the hydrocarbon industry from 85 percent to 50 percent.

The tax cuts come ahead of the mammoth planned initial public offering by the Saudi national oil company, which is part of Saudi Arabia’s Vision 2030 to attract foreign investments and diversify oil-dependent economy.

Rystad said that the tax change means more money is left for Saudi Aramco, which makes the company more attractive for investors.

“This tax change has a huge impact on the valuation of Saudi Aramco. By drastically reducing the tax rate, more cash will go to the potential owners of the Saudi Aramco compared to the government. Assuming long-term oil prices averaging 75 USD/bbl, the valuation of the company increases from $0.4 trillion to $1.4 trillion” says Espen Erlingsen, VP Analysis at Rystad Energy.

Rystad Energy estimates the valuation of Saudi Aramco based on discounted free cash for each individual field. The valuation of Saudi Aramco heavily depends on the tax regime, and how the profit is being split between the government (through taxes and royalties) and the owners.

“The total value of Saudi Aramco’s revenue after costs is around $3.4 trillion. With the old tax system, around 88% of the value went to the government through taxes and royalties, while with the new system around 60% of the profit goes the government. Oil price should be reaching 75 USD/bbl by the time of the public offering; this is also close to the long-term oil price needed to justify the share price of other large global oil companies,” said Erlingsen.

In a statement following the announcement on the cuts, Saudi Aramco today welcomed the move “as another positive step in the diversification of the Kingdom’s economy.”

Commenting on the Royal Order, Amin H. Nasser, President & CEO, Saudi Aramco, said: “We thank the Custodian of the Two Holy Mosques King Salman ibn ‘Abd Al-‘Aziz Al Sa’ud for the Royal Order announcing the reduction of Saudi Aramco’s tax rate to 50 percent from 85 percent. The new tax rate will bring Saudi Aramco in line with international benchmarks.”

Nasser reiterated that Saudi Aramco would continue to make a critical contribution to the diversification and growth of the Saudi economy in line with Saudi Vision 2030.