By Spencer Mann,
With its reputation almost synonymous to the export of oil, Saudi Arabia is home to the largest oil exporting company in the world, Saudi Aramco. On March 27th, the government announced that it will be cutting the income tax rate of Saudi Aramco by 35 percentage points, from a rate of 85 percent to 50 percent. This change, retroactive to January 1, will allow the oil giant to retain billions of dollars to its name.
This decision is not one without in-depth planning, as Saudi Aramco is set to embark on an IPO that could value the company at $2 trillion, according to Bloomberg. This move, which is rumored to be set for late next year, would net much more money to both the company and the Kingdom. The significant lowering of the tax rate, which in the short term will net much less tax revenue to the Saudi Arabian government, is to put the rate much more aligned with the other oil goliaths.
Doing so would, in turn, let Saudi Aramco have a much stronger portfolio and command a higher gross profit margin, which will make the company much more attractive to any potential investor. Although only 5 percent of the company is anticipated to be released in the landmark IPO, the competitive valuation is expected to command an enormous increase of value to the firm.
This upswing is where the Saudi Arabian government not only expects to recover its lost tax revenue but overall net an even higher amount of proceeds than in the previous arrangement.
Not all see this plan as a slam-dunk for the Saudis, however. Some understand the expectation to raise over $100 billion as a bit ambitious, as historical concerns about fossil fuel usage, Middle Eastern politics, and the competition’s oil prices could prevent the turnout that Saudi Aramco will be expecting. While there is no doubt that an IPO by the company will be colossal, pushing to be the largest in history may not be as easy. The massive tax cuts, however, are a vital first step to reaching their goal. Doing so will increase Saudi Aramco’s revenue by 300 percent, which would instantly increase the company’s current valuation to somewhere between $1 trillion to $1.5 trillion, per a report released by Sanford C. Bernstein & Co., LLC., an investment research firm.
Additionally, according to Bloomberg, its per-barrel profit will now fall in line with Exxon Mobil Corp. While that is a vast improvement compared to previous conditions, over $500 billion remains to be seen in value investment researchers ahead of the $2 trillion valuation.
To create value and competition among investors, the company has specific usage plans for the billions that it has freed up from the lower tax rate. Saudi Aramco now has vast reserves of money ready to payout in the form of dividends, which will likely entice large sums of investors when the time comes. The added competition for the sliver of the company that will be released late next year may drive up the price of each share, which is how Saudi Aramco hopes to reach that key $2 trillion figure. As the Saudi Arabian finances will also rely on these dividend payments to compensate for the lack of income tax revenue, investors have much reason to expect the sums to be large and regularly occurring.
Saudi Aramco had recently added a few new plays to its playbook in coordination with the royal government. In a countrywide effort to diversify its finances, both the government and the oil company are working to change its structure to accommodate each other. With its eyes marked on the largest IPO in history, the events leading up to that point from both entities will tell just how successful the offering ends up.
A version of this article appeared in the Tuesday, April 4th, 2017 print edition.
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