Aramco valuation jumps after tax cut

The decision to slash taxes paid by Saudi Aramco to the government by over 40% has increased the corporate valuation of the company by some USD 1 trillion, consultancy Rystad Energy said on Tuesday.

“Assuming long-term oil prices averaging USD 75 per barrel, the valuation of the company increases from USD 0.4 trillion to USD 1.4 trillion,” Espen Erlingsen, Rystad’s vice president, said in a statement, adding that the total worth of Aramco’s revenue after costs would amount to some USD 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,” he added.

Amid intense speculations over Aramco’s price tag in recent weeks, Saudi officials continue to insist that the value of the company at an IPO scheduled for next year, which is expected to be the world’s largest to date, would be at least USD 2 trillion.

On the other hand, a majority of industry sources polled prior to Monday’s decision to bring taxes paid by the giant down had estimated that the firm’s market value stood at between USD 1 trillion and USD 1.5 trillion.

It is impossible to come up with a reliable figure until the firm releases detailed financial information, consultancy Sanford C. Bernstein & Co told Reuters, but its massive oil reserves could make it attractive to investors even at a valuation of USD 2 trillion or higher.

Others have disagreed.

“If they reduce the tax rate to 50%, as is being discussed, the [net present value] only goes up to USD 419 billion,” energy hedging expert Robert Boslego wrote for Seeking Alpha last month. “Furthermore, the government cannot meet its budget if it reduces its tax rate that low.”

At the announcement of the tax cut on Monday, Saudi Finance Minister Mohammed Al Jadaan denied it would have a negative effect on the country’s finances.