Breakingviews - Aramco’s mighty value reflects mini investor base

The logo of Saudi Aramco is pictured outside Khurais, Saudi Arabia October 12, 2019.

LONDON (Reuters Breakingviews) - Saudi Aramco seems to be breezing through the Covid-19 era. Shares in the world’s biggest oil producer are more or less unchanged since January, a period in which Western rivals like Royal Dutch Shell and BP have lost over half their market value. It’s not just because Aramco is bigger and better, though.

Operationally, Aramco is far from immune to a virus that has knocked oil prices from $70 a barrel to around $40. In the three months to the end of September, its net profit fell 44% compared to the same period last year. Aramco’s return on average capital employed in the quarter was 15%, well ahead of Shell’s 4% but under half the level a year ago.

JPMorgan analysts estimate the company will produce operating cash flow of $61 billion this year. That won’t cover the $75 billion of dividends Aramco wants to pay, let alone $25 billion in capital expenditure. Net debt which was zero a year ago is now 22% of total capital.

At Aramco’s current $1.8 trillion valuation, that $75 billion dividend equates to a 4.1% yield. Exxon Mobil and Total both offer investors around 10%. But Aramco boss Amin Nasser has guaranteed the payout until 2024, and non-state investors are first in line to receive their share. That gives Aramco stock bond-like qualities.

The company remains a good bet to be the last oil major standing. Its production costs are lower than rival drillers. Bernstein analysts reckon daily global oil demand could recover from 92 million barrels this year to 103 million barrels by 2030, even if China joins Europe in aiming to achieve net zero carbon emissions by 2050. If so, a lack of investment now would see oil prices rebound.

There’s also a more prosaic explanation for Aramco shares’ stability: the company’s tiny free float following last year’s listing. Investors other than the government hold only 1.7% of the shares, and foreign investors accounted for less than a fifth of those following the listing. Saudi institutions which hold the majority of the free float may feel less comfortable than an overseas counterpart in selling out, as Crown Prince Mohammed bin Salman might consider this an implicit criticism of his rule. Aramco’s Western rivals have fewer ways of ensuring their shareholders’ loyalty.


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