Stock Deconstruction

Why does Saudi Aramco’s share price look so slick?

Oil prices have been battered by a price war between Saudi Arabia and Russia and fears of a coronavirus-led global recession, but Saudi Aramco’s share price has outperformed its peers.

The price of ICE Brent Crude Oil plummeted from around $55 at the start of February to just $22 on March 30. In a recent CNBC survey, analysts projected that it could fall below $20 this quarter and maybe even slip to near $10. So, what does that mean for Saudi Aramco and other major oil producers, and their respective share prices?

Lower demand caused the crash as the coronavirus pandemic battered the global economy. Alongside this Saudi Arabia slashed selling prices and ramped up oil flows after Russia refused to back an OPEC plan to deepen production cuts.

Since the start of March major oil stock BP [BP] has seen its share price dive from 395p to 298p. Royal Dutch Shell [RDSA] dropped from 1,663p in late February to 916p in mid-March and now sits at 1,329p. Exxon Mobil [XOM] started this year at around $70 before falling to $31 in mid-March — as of 17 April, it was at $40.77.

Saudi Aramco [2222] — officially the Saudi Arabian Oil Company — floated on the Riyadh stock exchange last December at 32 SAR before dropping to 28.70 SAR in mid-March. It is now sitting at 30 SAR and not dramatically off its record-breaking $1.7trn valuation.

$1.7trillion

Valuation of Saudi Aramco

Saudi Aramco share price outperforms its peers

The company has taken a hit but has largely outperformed its peers during this tricky period. Saudi Aramco’s share price dropped 21% to a mid-March low before rising again. The share price is currently down 14.5% for the year to date (through 17 April). In the same period, and by way of comparison, BP and Exxon have both dropped around 38%.

38%

Share price drop of BP and Exxon year-to-date

The differential could largely be down to Saudi Aramco’s management continuing to pledge a $75bn distribution to shareholders this year and its state-owned model — the kingdom owns 98% — provides further certainty to its present and future performance.

The group recently posted a 21% drop in 2019 profit to $88.2bn due to lower prices, missing analysts expectations of $92.35bn. However, sector experts remain positive.

“Given that oil companies are dividend-based, today’s results confirm our view that Aramco is in solid position to continue distributing good dividends,” Mazen Al-Sudairi, head of research at Al Rajhi Capital, said in a note reported by Reuters.

Saudi Aramco has also appeared more bullish than its rivals over being able to cope with the new low-price environment. The company has stated it could sustain its maximum production capacity of 12 million barrels a day for up to a year without any need for a rise in capital spending. It noted it was “very comfortable” with oil prices around $30 a barrel. “We see the increased level of production having a positive impact on our financials in the long term,” chief executive Amin Nasser said.

“We see the increased level of production having a positive impact on our financials in the long term” - Saudi Aramco chief executive Amin Nasser

 

Reaching an agreement

Despite this, recent talks between the world’s three biggest oil producers, Saudi Arabia, Russia and the US, along with OPEC and other oil-producing nations, concluded with a tentative agreement to cut production with the aim of supporting oil prices and stabilising markets.

However, some remain sceptical. For example, Jamie Webster, energy analyst for the Boston Consulting Group, recently told the Telegraph that any production cut would be a “sideshow to the demand collapse”. Furthermore, he said that up to 8% of Saudi Aramco’s GDP could be wiped out this year if oil prices remain low. Furthermore, Goldman Sachs had suggested in February that any drop in production may be too little too late.

Saudi Aramco’s state backing and dominant sector position should keep its value and investor appeal high, but what of its rivals? BP has said it is looking to cut capital spending by a quarter this year, potentially leading to a decline in production but protecting its dividend and finances. Shell is also determined to maintain its dividend.

However, analyst Stuart Joyner at Redburn is cautious: “At current crude prices, we still see a clear and present risk of oil dividend cuts, including from BP.”

“At current crude prices, we still see a clear and present risk of oil dividend cuts, including from BP” - Redburn analyst Stuart Joyner

 

But Andrew Hecht, writing in Stock News, is more bullish about BP and others. He said Exxon Mobil’s future was strong given that it is “crucial for US national security and energy independence.” The same, he added, holds true for BP and Shell.

“The three companies are the best-in-breed in the oil patch,” he said. “While they are not state-owned entities like the Chinese, Saudi, and Russian producers, they are as close as an investor can get to companies that have governments behind their backs.”

Although prices are at the bottom of the well, in the eyes of the analysts, big oil operators remain resilient.

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