Aramco’s production cuts have caused a decline in the company’s stock over the past few months, while other major oil companies have enjoyed stock price rises. Over the longer term, however, Aramco will be “the last one standing” in oil.
Bloomberg recently reported on the Saudi state company’s stock performance, noting shares in Aramco had shed 17% since the start of the year while Exxon, for instance, had added 17%, and Shell had seen its stock rise by 4.6%.
The report noted, however, that Aramco is a very different company from either Exxon or Shell because it is still majority-owned by the Saudi state, which can direct corporate strategy and is indeed doing just that. It’s worth noting that from a certain perspective, Aramco’s production cuts helped keep prices above a certain level, helping Exxon, Shell, and the rest of Big Oil keep posting higher results.
There is something else as well. The stock movement news suggests Aramco is not particularly popular among oil investors. Yet the Saudi state giant recently issued a secondary share offering, which raised a billion dollars more than initially planned and which turned out to be rather popular with non-Saudi investors who gobbled up half of the offering.
“Aramco will be one of the last standing oil producers after a long transition to renewables and its dividend yield is significantly higher than oil major peers,” Hasnain Malik, head of equity strategy research at Dubai-based market intelligence firm Tellimer, told Bloomberg. “But, near-term, its growth is hamstrung by Saudi shouldering the burden of OPEC+ output restraint whereas the majors are under no such constraint.”
Indeed, Aramco has made it clear that despite certain investments in non-oil endeavors such as EV maker Lucid Motors, it is dedicated to its core business and believes this core business would survive the transition, as do other national oil companies in the Middle East as well. Just a month ago, the company announced a string of new oil and gas discoveries that it signaled it would invest in developing, even as the cuts remain.
In addition to having yet more untapped oil and gas resources to develop, Aramco sports the world’s lowest production costs, which help boost its bottom line even when international prices are down. As The Economist noted in an expose on the Saudi state company, those low costs also mean low emissions—which could become pertinent in a world where some oil importers care about the ethical sourcing of their crude.
Aramco’s greatest weakness with regard to its stock is the majority ownership of the Saudi state. This majority ownership limits the company’s actions to only those that would benefit the state and, right now, puts pressure on Aramco to keep producing fat dividends because the Saudi budget needs them for the ambitious economic diversification program spearheaded by the de facto ruler of the kingdom, Crown Prince Mohammed bin Salman.
It was the government that ordered the cuts, and it was also the government that ordered the suspension of a production capacity expansion program earlier this year. One could argue, however, that what’s good for the biggest shareholder in the Saudi state major is good for the small shareholders as well. Higher oil prices lead to higher profits, which lead to consistently high dividends—and individual investors are probably just as fond of these as institutional and sovereign investors are.
So, Aramco’s stock has lost 17% over the past 12 months, moving in relative sync with oil prices, which have shed 10% in the past year. It is still making its dividend payments and exploring for more oil and gas, to which end it has a budget of between $48 and $58 billion for this year alone.
By Irina Slav for Oilprice.com