Saudi Aramco cleans up financials to bolster valuation
The country’s highest authorities are working with Saudi Aramco and its IPO advisers to untangle its finances from those of the state. This involves shifting certain liabilities from the company’s accounts to that of the government.
A series of legal instructions from the kingdom’s cabinet — resolutions from the Council of Ministers — have been issued in recent months but not made public, say four people briefed on the matter.
This builds on a royal decree issued in March to slash the corporate tax rate for Saudi Aramco from 85 per cent to 50 per cent, seen as facilitating a higher dividend to future shareholders and boosting its market value.
Reflecting efforts to present a streamlined set of financials to investors, an instruction has been issued to shift historical debts from foreign governments, including Jordan and Iraq, from Aramco’s accounts on to the government’s books, the people said.
Under a separate resolution the Kingdom plans to create a mechanism — via a special tax deduction — to compensate Aramco for the financial cost of subsidising fuels such as petrol for domestic motorists and gas for power generation, they added.
Also payments that state entities, such as the national airline Saudia and the domestic utility Saudi Electricity, owe to Aramco will be moved to the finance ministry, they added.
Saudi Aramco and the government’s information ministry declined to comment.
The company will present 2015 and 2016 financial statements alongside pro-forma accounts for 2017 to investors for the first time ahead of the IPO, which is set to be the world’s biggest ever flotation.
Advisers have warned executives and officials that should these matters — which present huge financial and legal risks for the company — not be resolved they could cost Saudi Aramco hundreds of billions of dollars in lost valuation, three people have said.
Managing the subsidy issue has been a priority for those working on the IPO’s planning. Bankers estimate mismanagement of this component alone could slice $300bn off Aramco’s valuation, one person briefed on the matter said.
While Aramco has never disclosed the full extent of its subsidy burden, the 2017 Saudi budget implies reforms across the energy and water sectors will eventually save the country more than $55bn each year by 2020, Anupama Sen at the Oxford Institute for Energy Studies said in a March research paper.
The kingdom plans to gradually increase energy prices towards market rates starting in 2017.
The Saudi Aramco flotation is the centrepiece of Prince Mohammed’s plan to overhaul the Saudi economy and diversify the country away from oil. IPO proceeds will be ploughed into alternative industries such as technology and tourism.
Additional reporting by Simeon Kerr