How Much Is Aramco Worth? Questions Over Valuation Rise as IPO Approaches

Saudi Arabian Oil Co., better known as Saudi Aramco, is considering pricing its much anticipated initial public offering at the upper end of a targeted range -- at 32 riyals ($8.50) per share -- that would value the deal at $25.6 billion. This would make it the biggest new listing in history, exceeding Chinese internet firm Alibaba Group Holding (BABA), which raised $25 billion in its 2014 IPO.

The highest end of the IPO price range would value Saudi Aramco with a market cap of $1.71 trillion. While that valuation would give Saudi Aramco the biggest market cap on earth -- well ahead of the $1.17 trillion value of Apple (AAPL) – it would nonetheless fall short of the $2 trillion value initially targeted by Saudi Crown Prince Mohammed bin Salman.

Saudi Arabia is offering a 1.5% stake in Saudi Aramco through the IPO.

The final price will be determined on Thursday.

Saudi Arabia said it wants the Organization of the Petroleum Exporting Countries, which meets in Vienna on Thursday and Friday, to support higher oil prices ahead of the IPO by agreeing to production cuts of more than 1 million barrels a day through March.

The Wall Street Journal reported Saudi Arabia must have "stable prices of at least $60 a barrel." A Saudi oil adviser said it "can't afford to have a declining oil price as it would hurt domestic investors who have bought into the IPO."

Meanwhile, the government of Kuwait said it will invest as much as $1 billion in the initial public offering. Abu Dhabi has already decided to pour $1.5 billion in Saudi Aramco.

Saudi Arabia was counting on regional allies to participate in the offering after it abandoned plans to market the IPO globally.

However, not everyone is on board with this huge offering.

Malaysia state-owned energy company Petronas and Lukoil, Russia’s second biggst oil producer, both declined invitations to take part in the offering.

“Petronas would like to confirm that after due consideration, the company has decided not to participate in Saudi Aramco’s initial public offering exercise,” Petronas said.

The Saudis have said the offering is part of a wider strategy to diversify its economy away from a reliance on oil. But some analysts say the IPO will not help to accomplish that task.

“Just selling a 1.5% stake in an oil company is not really going to achieve an enormous amount,” said Charles Hollis, director at intelligence consultancy Falanx Assynt.

Others are questioning Saudi Aramco’s true value.

A survey of 31 international asset managers revealed that majority of them think Saudi Aramco is overvalued -- by as much as 35%.

The survey, conducted by brokerage house Bernstein and reported by Fortune, suggested Saudi Aramco should trade at an average valuation of about $1.26 trillion.

“While investors agree that Aramco has superior financial and franchise strength, weak corporate governance and limited earnings growth are reasons for the discount relative to peers,” Bernstein said. “While this does not mean the IPO will be a failure, it does mean that share gains will be highly dependent on oil price. Indeed, the lack of external funds raised by the IPO, plus the pressure to make the privatization a success for domestic Saudi shareholders, are yet more reasons that the kingdom of Saudi Arabia will want higher oil prices.”

Bernstein added that Saudi Aramco had “missed an opportunity by not pricing the IPO at a level which would be attractive to institutional investors.”