Saudi Aramco
Saudi Aramco is a Saudi Arabian state-owned and controlled petroleum and natural gas company headquartered in Dhahran, Saudi Arabia. It was created in 1933 as the Californian-Arabian Standard Oil Company and was renamed Arabian-American Oil Company or Aramco in 1944. Petroleum, natural gas, and various petrochemicals are among its products. It is one of the world's most valuable oil businesses, with a market value estimated to be between $2 trillion and $10 trillion. What gives the company its high quality is the value of crude oil reserves which has been measured to contain more than 260 billion barres making it the second largest oil company in the world. The company also produces the highest number of oil barrels in a day. Saudi Aramco also operates the only hydrocarbon making it the largest Gas system in terms of network coverage. One of the main areas of production happens at the Ghawar field which has been established to be the largest oil onshore field.
Valuation
There are a number of ways in which a company can increase its valuation. For the case of Aramco, there are many ways in which it can improve its valuation from USD 400 billion to USD 2 trillion. In addition to the reduction of tax by the government from 85% to 50%, the company also needs to implement a number of measures that will see its stock values increase significantly. Some of the measures that can be taken include.
Review the Marketing and Advertise its Return On Investment
Aramco company has a potential of improving its valuation if will consider doing a lot of marketing for its products. The company executives should convince the shareholders including the state to allow the company to spend more in order to win more customers through the use of an effective marketing and market mix (See-To and Yang 283-296). On the return on investment, the company needs to convince investors that the company is giving more return to the shareholders’ funds. By so doing, the public will view the company as very profitable and a result the value will increase significantly.
Reduce Overhead Expenses
The company should consider looking at the economic implications of the overhead expenses such as selling, general and administration expenses on the value of its stocks. In an overhead review, Aramco should see a way of empowering the different line managers to see how to cut costs in each of the department (Flavell 786-787). If a cost reduction discipline is adopted by the company, the company will be able to increase its net profits which will attract the intention of the investors to invest in the company.
Track Financial Performance Ratio
There are a number of financial ratios that can be used by Aramco to track its levels of income earning, profitability, working capital, bankruptcy, liquidity, and leverage. These ratios will give a summarized performance of the company and enable the management to work on areas that they feel are not bringing impact on the final profits. Performance ratios further allow the company to track its improvement or decline in productivity over a period of time (Flavell 786-787; Patena, np). By tracking all the performance, Aramco can figure out in advance what they need to do so as to meet the expected productivity level and in the long run, its value of the stock will increase. For example, when the world prices for fuel are high, Aramco can decide to reduce its prices by a certain amount and use the ratios to test if there is a significant change by doing so.
The Company Should Identify Growth Markets
Research has shown that companies whose stocks sell for higher prices are those that expand yearly due to growth in sales volume. Aramco has a potential of improving its sales system by making use of the latest technology to track all increasing petroleum products from it's ours. Investors are interested in a company that grows. They are willing to invest in companies that are growing and show the ability to continue to grow in future. Aramco should demonstrate this ability. To adapt to the growth, the company should make use of the latest production methods and come up with new markets for its products (Patena, np). Moreover, Aramco should make use of the latest technology and continuously train its workforce to be at par with the latest technological and technical skills. For a company to bridge the gap of valuation, it must develop a definite plan to get there.
Seek Financial Consultation Services
A company that wants to attract more investors and improve its valuation must seek good and competent investment advisors to get through all the important fronts. The management of Aramco should, therefore, be inviting a team of consultants ranging from financial consultants, Investment bankers and HR consultants who go through all the pertinent issues of the company to establish what needs to be corrected or done (Patena, np). Consultants will also aid in ensuring that the financial records of the company are consistent and intact. Moreover, any pending legal issues will have to be resolved so that the image of the company in the sight of the investors is not questionable.
Aramco should Consider Listing IPO
Initial Public Offer for Aramco will be very valuable. Since the company produces more oil than any other company, the listing will attract a number of investors. In 2016, the company produced an average of 10.5 barrels of oil in a day. The reserves used up totaled an equivalent of 15% of the world oil. The company has also adopted a modern refining network that is available in all countries in the world. The main reason behind public offering for the company will be to ensure that its value reaches the target of $2 trillion (Zhdanov and Ron 2017). Despite earlier mismatches of estimates in the value of the company, problems such as high political influence and lack of transparency should be dealt away with. Issues of possible misalignment between the government and the private investors should also be dealt with to ensure that potential investors don't find any issues to restrain from taking up the offers. The value of the offering will be depending on a number of factors including the price of the oil and the taxes that the government levies on the Saudi Aramco products. The reduction of the company's tax rate will also have an influence on the value of the company.
Lowering tax on the company is set to increase investor appetite and this translates to a higher value of the company. The government was warned by analysts that the high tax rate on the corporation makes it more unattractive to the investors compared to its international competitors (Reem and Marwa 2017). Despite the firm constituting over 20% of the government's royalty payments, reducing its taxes will not affect the benefits it brings to the authority because it owns the most shared in the company. Therefore, the corporation will still be receiving money from the government.
Ultimately, depending on the confidence in Saudi Arabia's economy and the United economic kingdom's stability, investors who will be considering the purchases of Aramco shares will also need to take into account how closely and intertwined the company is with the government's economic and political strategies. For instance, Aramco sells all of the natural gas it produces to domestic customers at below market prices that underpin the country's industrial base.
Conclusion
With regard to the fact that all the figures, both the $2 trillion provided by the Saudi Arabian government and the $400 billion provided by the analysts, are not real values and merely estimates, the true value of the company might be far much smaller than what is reported. It is therefore appropriate for the company to issue IPO when the correct value of the organization will be have been known and establishing how the figures were calculated.
References
Blas, J. (2017, September 14). Saudis Prepare for Possible Aramco IPO Delay to 2019. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2017-09-13/saudis-are-said-to-prepare-for-possible-aramco-ipo-delay-to-2019
Gregory, P. (2017, June 21). How Much Is Saudi Aramco Worth? It Depends On The Country's Institutions. Retrieved from Forbes: https://www.forbes.com/sites/uhenergy/2017/06/21/how-much-is-saudi-aramco-worth-it-depends-on-the-countrys-institutions/#4742cc197b83
Flavell, RB. "Company Valuation." Omega 1.6 (1973): 786-787. Web.
Patena, Wiktor. "Company Valuation: How To Deal With A Range Of Values?." SSRN Electronic Journal (2010): n. pag. Web.
Reem, S., & Marwa, R. (2017, March 27). Saudi Arabia sweetens huge Aramco IPO with a tax cut. Retrieved from Reuters: https://www.reuters.com/article/us-saudi-oil-tax/saudi-arabia-sweetens-huge-aramco-ipo-with-tax-cut-idUSKBN16Y1AG
Saadi, D. (2017, November 9). Saudi Aramco awards $4.5bn worth of contracts to boost gas output. Retrieved from The National: https://www.thenational.ae/business/energy/saudi-aramco-awards-4-5bn-worth-of-contracts-to-boost-gas-output-1.674504
Saudi Arabian Oil Co. (2017). Strategy. Retrieved from Saudi Aramco: http://www.saudiaramco.com/en/home/about/strategy.html
See-To, Eric. W. K., and Yang Yang. "Market Sentiment Dispersion And Its Effects On Stock Return And Volatility." Electronic Markets 27.3 (2017): 283-296. Web.
