EFTA02659583.pdf

From: Richard Kahn < Sent: Monday, February 27, 2017 7:32 PM To: jeffrey E. Subject: Fwd: ***HOW TO THINK ABOUT the SAUDI ARAMCO IPO...(it's a perpetual bond offer)•** Richard =ahn HBRK Associates Inc. 575 Lexington =venue 4th Floor New York, NY 10022 tel fax cell = Begin forwarded message: From: =/b>"Ens, Amanda" < Subject: =/b>'"HOW TO THINK =BOUT the SAUDI ARAMCO IPO...(it's a perpetual bond =ffer)*** Date: =/b>February 27, 2017 at 12:39:59 =M EST To: =/b>"Rich Kahn"< Reply-To: =/b>"Ens, Amanda" < HOW TO THINK ABOUT the =AUDI ARAMCO IPO...(it's a perpetual bond offer) The Aramco IPO process continues to gain momentum and the =ress is still anchoring the market on the $100bn figure for a 5% stake =3D $2tr total valuation. That figure is starting to be questioned, =owever, with WoodMac reportedly=giving an alternative DCF value of only $400bn, which depends on tax =cenario assumptions. =/span>As the debate heats up, here are 3 points worth considering re: =ow to value Aramco: EFTA_R1_01906678 EFTA02659583 1. =/span>Does Saudi Aramco have an equity story? =/span>Consider this: Aramco supposedly has 260.270bn barrels of =eserves. Round =umbers, Saudi produces c. 10mb/d = 3.65bn barrels per year, so more =han 70 years of reserves. Would the market really care if the expert work =hows that Aramco has 80 years of reserves or only 60? I would argue that =he equity value here is not about the reserves in the ground. 2. =/span>So what really matters is the dividend payout policy. That will surely be clearly articulated in the offer =ocument, and of course investors will have to make a judgement call on =he risk that the policy gets revised at some point in the =uture... 3. =/span>Which means valuation is function of the spread over the =audi sovereign rate. =/span>Saudi Arabia is rated Al at Moody's, the =ifth-highest investment grade; and the record bond offering in October =riced 30 year money at 210bps over US Treasuries. Right now the US =0-year is just under 3%. So for argument's sake let's =ay that Aramco should yield 6%...to be worth $2tr, using the perpetual =ond formula, it would need to pay out $120bn a year to investors =orever. =/span>That might be a big ask given the royalties and the 85% income =ax rate? To be =orth WoodMac's $400bn, it would =eed to pay out $24bn. =/span>To put that in perspective, RDS's 7% yield implies a =ayout of about $15bn per year... NB: If the Aramco IPO goes well, maybe other OPEC nations =ill IPO stakes in their NOCs? Happy to discuss. Jake Greenberg Global Natural =esources Specialist Bank of America Merrill Lynch 2 King Edward St., London, EC1A 1HQ T+ The power of =lobal connections'" 2 EFTA_R1_01906679 EFTA02659584 This material was prepared by =ales personnel of Bank of =merica Merrill Lynch and is subject to the terms available at the =ollowing link: http://corp.bankofamerica.com/business/smb/landing/emaildisdai=er/emea/emea-gmi-disclaimer This =essage, and any attachments, is for the intended recipient(s) only, may =ontain information that is privileged, confidential and/or proprietary =nd subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are =ot the intended recipient, please delete this message. This message, and any attachments, is for the intended =ecipient(s) only, may contain information that is privileged, =onfidential and/or proprietary and subject to important terms and =onditions available at http://www.bankofamerica.com/emaildisclaimer. If you are =ot the intended recipient, please delete this message. 3 EFTA_R1_01906680 EFTA02659585