4 Comparisons Between Aramco And Apple, Two Trillion-Dollar Companies

Aramco is the most profitable company in the world

Apple has become the world\'s first publicly traded company to be valued at $1 trillion. Photo Credit : AP | Mark Lennihan

Apple AAPL +2.98%’s market cap recently breached the $1 trillion mark today, making it the first company to do so. What does that mean for Saudi Aramco, the oil giant that many consider the world’s, “most profitable company?” Saudi leadership continues to insist that an Aramco IPO is pending, even though there are indications that the initial public offering process has stalled. If Saudi Arabia does intend to take its national oil company public, perhaps Apple’s enormous valuation can tell us something about what Aramco should be worth.

It is hard to judge Aramco’s value mostly because we do not have the financial details. As a private company, Aramco has no reason to share its financials, so it does not. Some information has been leaked and some can be deduced.

1. Profit:

Last month, Reuters reported on what it said were leaked financial data from Aramco for the 2016 fiscal year. According to Reuters, in 2016, when oil prices were low, Aramco profits were $13.3 billion. That was a drop of over 20 percent from the year before, but the drop paled in comparison to the much larger profit drops of competitors like ExxonMobil XOM -0.6% or Royal Dutch Shell.

Aramco’s profit in the first half of 2017 was $33.8 billion, according to an April Bloomberg report. This growth was due to higher oil prices and a significant change in the company’s tax requirements. Saudi Arabia changed the company’s income tax liability from 85% to only 50%. The price of oil has been higher in 2018, and Aramco increased exports this year. The presumption is that profit in the first half of 2018 exceeded $33.8 billion. Again, it is widely assumed that Aramco is the most profitable company in the world.

Typically, analysts have estimated that it costs Aramco between $2 and $10 to produce a barrel of oil, because the oil in Saudi Arabia is so easily accessible. This is the cheapest in the world. Reuters reported that some analysts believe the cost is as low as $1, but if we take the $2 to $10 range we can see about how much Aramco makes on oil per day. Aramco produces about 10 million barrels per day. Much is exported, much is refined internally, and some is sold domestically. At a conservative average price of $70 per barrel of oil, Aramco can see sales minus production costs of $600 to $680 million a day on crude oil. Aramco also has revenue from its downstream operations and a few other business operations like its venture capital arm and some management contracts.

Compare all of this to Apple, which saw profits this quarter of $11.5 billion. It was $8.7 billion a year ago. Apple, like Aramco, sells its product at huge margins. Apple makes great computers and tablets, but Apple’s big product is the iPhone. It is that communications magic that we take with us everywhere which has made Apple worth a trillion dollars.

2. Assets:

Aramco does not own its oil reserves. Saudi Arabia does, but Aramco operates with an exclusive concession agreement. That means Aramco is permitted to extract oil anywhere in the kingdom, and only Aramco is permitted to do so. Last year Aramco announced that Saudi Arabia had over 260 billion barrels of crude oil in the ground. That number is an estimate, and no one knows for sure, but there are analysts who believe it is too high and others who believe it is too low. At the current rate of oil production and the current estimates of oil reserves, it is believed that Aramco can expect to continue pumping oil for another 70 years.

Compare that to Apple. Apple’s most valuable assets are clearly its intellectual property and its brand. Its engineering prowess and marketing talent are a distant third and fourth. By the time Apple’s patents expire, most of them will likely be worthless old technology. To prosper in the future, Apple must continue to innovate and continue to make its brand impressive. Apple could also choose to diversify in the future, just as it went from home computers to music players to smart phones.

Aramco may run out of oil reserves, but that will not be until after every investor is long since retired and maybe dead. Moreover, as reserves run out, we can expect the value and price of a barrel of oil to rise, thus increasing the company’s profits. Also, Aramco is preparing for a time when its oil production business does not dominate. It is diversifying in downstream operations and investing in alternative energies (such as solar technology) and other green technologies (like carbon capture cars).

3. Cash:

Both companies are believed to have large hoards of cash. Apple has over $240 billion of cash. That alone justifies one-quarter of the trillion dollar valuation. Of course, as cash, it is not doing much for the future. We do not know how much cash Aramco has, but we do know that since the 1980s, and especially over the last 20 years, Aramco has used much of its prodigious cash assets to diversify and expand into Asia, North America and elsewhere. Earlier this year, Apple announced a $100 billion buyback program and a 16 percent dividend increase, both of which serve to increase the stock value but not necessarily the future prospects of the company. Aramco, on the other hand, is private so it does not focus on the stock value, and it seemingly uses its cash to expand through new projects or acquisitions.

4. Operating Environment:

Apple does have a huge advantage over Aramco. It is a U.S. firm and enjoys all of the benefits that entail. Apple not only operates largely in the U.S. with the U.S. legal system, U.S. talent and U.S. stability. Apple also benefits because investors know that and appreciate it. Investors are comfortable with the American system. It is yet to be seen how comfortable investors would be with an energy giant from Saudi Arabia operating largely under the Saudi system. At valuations of these sizes, perception is important.

The crown prince of Saudi Arabia said in 2016 that he believed Aramco could be valued at $2 trillion upon an IPO. That was when the price of oil was much lower, and it seemed to many to be an outrageous claim. A publicly traded Aramco would be worth what the market says it is worth, but in the search for an astronomical valuation it cannot hurt that someone else has already breached the mythical barrier of $1 trillion.

This article originally appeared on : Forbes