Tax cuts lift Aramco value by $1 trillion: analyst

29/03/2017 05:39 AST

Saudi Aramco's upstream portfolio has increased by about $1 trillion following Saudi Arabia’s announced tax rate reduction, Rystad Energy, an oil and gas consulting service, has said.

Yesterday, Saudi Arabia announced that the tax rate for the petroleum industry would be reduced from 85 per cent to 50 per cent. This change implies that more money is left for the Saudi Aramco, which makes the company more attractive for investors, it said in an analysis.

Aramco is preparing to launch an IPO next year, which would sell as much as 5 percent of the company. Deputy Crown Prince Mohammed bin Salman, who leads economic reforms, has said the IPO will value Aramco at a minimum of $2 trillion.

“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," said says Espen Erlingsen, VP Analysis at Rystad Energy.

"Assuming long-term oil prices averaging $75 per barrel, the valuation of the company increases from $0.4 trillion to $1.4 trillion,” he said.

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, it said.

“The total value of Saudi Aramco’s revenue after costs is around $3.4 trillion. With the old tax system, around 88 per cent of the value went to the government through taxes and royalties, while with the new system around 60 per cent of the profit goes the government. Oil price should be reaching $75 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,” commented Erlingsen.

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