Can Aramco Win Over Western Investors Yet?

• WSJ: Aramco’s offering would be a hard sell for Wall Street investors because aside from its dividend.
• Back in 2019, Aramco could not make itself attractive enough for those investors because companies such as Exxon and Shell or BP offered a higher dividend yield.
• Observers note that Riyadh’s diversification efforts are paying off, with non-oil industries’ contribution to the budget rising to about half the total.

Last week, Saudi Arabia’s energy behemoth Aramco announced a secondary offering of shares that was estimated to bring in up to $13 billion. The offering represented 0.64% of the company’s total stock and was sold out within hours of the launch. The question is, who bought into the Saudi company?

Details about the distribution of buyers are yet to emerge. For now, the only official information available is that demand for the stock overtook supply hours after Aramco’s banks started taking orders from institutional investors. Yet there is already a suggestion that Western investors were unlikely to have crowded into the Saudi company’s offering.

It comes from the Wall Street Journal, whose Carol Ryan argued in a recent piece that Aramco’s offering would be a hard sell for Wall Street investors because aside from its dividend, the Saudi company is still more expensive based on other metrics compared to U.S. supermajors. Noting that Aramco’s initial public offering went mostly to domestic investors, Ryan also recalled the cancelation of Aramco’s plans for a dual offering back in 2019, with one specifically targeting international investors.

At the time, the WSJ author notes, Aramco could not make itself attractive enough for those investors because companies such as Exxon and Shell or BP offered a higher dividend yield. Yet the Saudi company has not sat idly in the past five years. It has worked on building its investor attractiveness, and at the time of the secondary offering, its dividend yield stood at an estimated 6.6%, based on planned dividend payouts for this year, according to Bloomberg Intelligence.

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This may not be enough to entice international investors, however, argues the WSJ’s Ryan, because if Aramco gets fixated on dividend growth, it might end up having to pay more than it generates, which would affect its overall performance and essentially make it harder for the company to remain profitable—especially if oil prices fall further.

The chances of that happening appear to have increased recently after the latest OPEC+ meeting, which resulted in a sharp slump for benchmarks. That was the result of rekindled expectations for the return of some supply in the second half of the year. That return of supply is in no way guaranteed, with OPEC+ only saying that should market conditions change, it might roll back some of the cuts. Yet traders took this to mean that supply would be returning and reacted as though a glut was looming over the global oil market.

For Aramco, these price swings on a dime could be a problem, though not as big of a problem as its majority ownership. As the WSJ’s Ryan points out in her article, the fact that Aramco is majority-owned by the Saudi government puts it at a disadvantage compared with private supermajors in the West. This government ownership means Aramco “is basically an arm of the Saudi state and has an additional mission beyond just maximizing returns,” according to Rice University energy studies fellow Jim Krane, who spoke to Ryan.

Indeed, the purpose of the secondary offering has widely been perceived to be the generation of additional funds for Saudi Arabia’s Vision 2030 diversification program, which has an approximate price tag of a trillion dollars. With oil prices stubbornly lower than Riyadh needs them to be, a secondary offering was the obvious alternative for fundraising.

Speaking of prices, a recent report in the Financial Times suggested that demand for Aramco shares may indeed be a lot less guaranteed than the institutional orders after the offering’s launch would make one believe. According to unnamed sources quoted by the FT, the placement was postponed at the last moment on at least two occasions in the last few months. The most likely reason for that was changes in oil prices.

Saudi Arabia needs crude oil at over $96 per barrel in order to balance its budget. That’s according to the International Monetary Fund. This is an increase on earlier estimates that saw Saudi Arabia’s breakeven price at around $80 per barrel of Brent crude. That sounds bad because right now, there is no reason to expect oil prices to move this high anytime soon. At the same time, however, observers note that Riyadh’s diversification efforts are paying off, with non-oil industries’ contribution to the budget rising to about half the total.

As far as economic diversification is concerned, this is certainly good news for Saudi Arabia. As far as Aramco’s attractiveness for investors outside the Kingdom is concerned, it may not be such good news. So, the Saudi giant is also diversifying into low-carbon directions. The company recently inked preliminary deals with three U.S. firms for the joint development of low-carbon projects and was reported to be planning a stake purchase in Repsol’s wind and solar business.

Aramco’s attractiveness to foreign investors, especially Western ones pampered by the private supermajors, may be questionable, but the Saudi company is sure working to improve it.

By Irina Slav for Oilprice.com

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