Even before Aramco shares went live on Tadawul for the initial 1.5% of the company, and awaiting an international listing in markets like New York or London, investors are still scratching their heads.
Finance Minister Mohammed Al-Jadaan told Bloomberg TV in Davos: “It’s still on the cards, we made that very clear. But I don’t think it’s going to be anytime soon.”
Aramco raised $29.4 billion in the world’s biggest-ever initial public offering, selling shares at 32 riyals ($8.6) which has since risen in value, albeit erratically.
How do you make sense of a company, that’s is government owned and not subject to scrutiny by independent shareholders?
How do you invest in a company, albeit the most profitable one in the world, offering a dividend of $75 bn or 4% yearly yield, a percentage that is outpaced by most if not all international oil companies (IOCs)?
BP stock, for instance, has a yield of 6.4%.
How do you make sense of Saudi Aramco aiming for a $2trn valuation, a number that, theoretically, is out of reach, or is it?
How to look at Aramco equity investing
If you’re an Aramco investor, have a look at what will influence your company share prices. The stock prices of most oil companies goes up when oil prices rise. They tend to drop when oil prices fall. According to Forbes, this has not been the case for Aramco in its short publicly traded history and will not be the case for the foreseeable future.
Unlike IOC’s like Exxon, Chevron, BP and others—Aramco’s stock price will rise and fall on three unique issues over the next few years, according to Forbes.
1. The first is revenue generated by oil production reaching 9.82 million barrels per day last December, and not downstream operations as is the case for most IOCs. Aramco’s costs are also by far the lowest in the industry at $2.8 per barrel. So, Aramco’s profits per barrel significantly decrease when the price of oil increases too much. Pumping more, even at low prices will mean profits for Aramco, contrary to the situation for IOCs.
2. The second is that the Saudi government is not interfering in Aramco’s profitable operations and allows the company to keep its revenues, in contrast with NOCs having to typically send revenue directly to governments, which then sent back stipends to these companies.
3. Aramco is subject to geopolitical issues, such as attacks from Iran or Yemen, as it happened in the recent past.
Who is recommending Aramco stock?
Analysts at banks in the Middle East have written positively about Saudi Aramco since the company went public in December. But in the first weeks after the stock started trading, U.S. analysts mostly stayed silent.
That was partly why Aramco didn’t list its stock on a Western exchange, choosing instead Tadawul.
J.P. Morgan, however, has recently taken a very positive opinion on Aramco with analyst Christyan Malek writing that Aramco is worth $2 trillion.
According to Barrons, Malek’s argument revolves around the company’s growth outlook, inexpensive cost of drilling, and dividend, all of which he thinks justify Aramco’s premium valuation.
Globally, major oil companies trade at an average price-to-earnings valuation of 15.9 times 2021 earnings expectations, Malek writes. But Aramco’s unique characteristics, including its low cost of drilling and its secure dividend, justify a multiple of 18.3 times, he argues. Using that valuation and a cash-flow analysis, he comes to a price target of 37 Saudi riyals ($9.86).
Aramco’s break-even price for recovering oil is less than $10 versus closer to $20 for BP (BP) and more than $40 for Exxon Mobil (XOM) and Chevron (CVX), Malek calculates. That gives the company a return on capital of greater than 25%, versus about 10% for its peers.
Malek also notes that despite Aramco’s assets being severely damaged in the last September attack the company’s “swift mitigation” of the damage was to be admired.
Aramco has money raising tricks up its sleeve
Saudi Aramco has exercised its “over-allotment option” to raise the size of its already record breaking initial public offering, according to CNN.
Aramco said in early January it had issued an additional 450 million shares, raising the size of its IPO $3.8 billion to a total of $29.4 billion, from $25.6bn at IPO.
An over-allotment, called a “greenshoe option”, allows a company to issue a certain percentage of additional shares above what it had initially planned for an IPO that act as a stabilizing mechanism to keep shares from falling below their offering price.
According to CNN, though Aramco’s share price has slumped slightly since mid-December, the company will take home the additional profits from the over-allotment.