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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Saudi Arabia Unmoved By Oil Price Uncertainty

Aramco Oil

A reasonable assumption for investors is that Saudi Arabia would be deeply concerned about the current state of oil prices.

While prices have rebounded somewhat from their February lows, current price levels are still deeply depressed from the normal values of the last decade. Under this assumption, one would assume that Saudi Arabia would at least be thinking about cutting back its production in support of prices. Saudi Arabia is telling investors those assumptions are wrong.

Saudi Aramco, the state-run oil giant of the Kingdom, says that both its drilling and its IPO plans are unaffected by the price of oil. Amin Nasser, the CEO of the company, says that Saudi Aramco will keep investing in long-term oil projects and that it is winning the battle for market share by bringing in new East Asian customers. According to Nasser, the company is also moving ahead on its IPO process and it is considering whether or not it should list its shares on a foreign stock exchange as well as on the Saudi Arabian stock exchange.

It is impossible to be certain whether or not Mr. Nasser is just putting on a brave face regarding the firm’s indifference to oil prices in making major decisions, but it is possible that he is being genuine in his comments. In particular, Nasser noted that “the number of our customers in Asia is growing, and different customers see big value in doing business with Saudi Aramco”.

Nasser’s point is a good one – in times of uncertainty, in particular the type of economic uncertainty that is affecting much of the world right now, risk aversion on the part of firms everywhere will increase. That increase in risk aversion also means that firms will have a greater incentive to move to larger and more stable suppliers like Saudi Aramco versus smaller riskier firms. In that respect then, Saudi Aramco, and by extension Saudi Arabia, can benefit from the current economic uncertainty.

Nasser’s confidence may stem from the recent uptick in oil prices. The CEO noted that “compared to the beginning of the year, oil prices are continuously improving”. Nasser made this comment at a contract-signing ceremony for the Fadhili offshore gas plant. India’s Larsen & Toubro Ltd has a contract to build the facility, and Engie SA of France and the Saudi Electricity Co. were awarded a contract for a power plant at Fadhili. The Fadhili project will cost more than 50 billion riyals or about $13.3 billion. Related: ISIS Hits Largest Oil Field in Kirkuk, Kills Five

For investors, comments from Nasser and other major oil producers underline a serious challenge – the current oil environment is extremely challenging, and almost every other industry participant has better information than investors do. Oilprice.com and other companies offer information services to investors, but even with these tools, investors are at best on a level playing field with the oil majors when it comes to making decisions.

The lack of information and transparency in the oil markets makes investing in oil producing stocks just too challenging. Most investors aren’t willing to take on that kind of uncertainty and risk. Until most investors start to feel safer about the space and the information they are getting, it’s unlikely that they will want to move back into stocks in the sector, be it the Saudi Aramco IPO or the smallest tier of independent E&Ps.

By Michael McDonald of Oilprice.com

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