Saudi Aramco faces tough test less than a month after $25.6b IPO

FILE PHOTO: A sign of Saudi Aramco's initial public offering (IPO) is seen during a news conference by the state oil company at the Plaza Conference Center in Dhahran, Saudi Arabia November 3, 2019. REUTERS/Hamad I Mohammed/File Photo

Saudi Aramco’s status as an oil-producing behemoth located in one of the world’s most turbulent regions always marked it as likely to suffer bouts of volatility.

But few could have expected the stock to face so stern a test less than a month after the company’s historic $25.6 billion initial offering.

The world’s most profitable company extended declines Monday after dropping to its lowest closing price yet a day earlier, as the U.S. killing of Iran’s most prominent general last week triggered fresh concern of a wider conflict in the Gulf region. The move suggests that rising oil prices — Brent crude has climbed above $70 a barrel for the first time since May on a closing basis — aren’t necessarily a boon for the energy giant.

Aramco fell 0.6% as of 10:32 a.m. in Riyadh to 34.35 riyals, narrowing its gain to 7.3% since it listed at 32 riyals on Dec. 11. It tumbled 1.7% Sunday.

While Aramco has performed better than Saudi Arabia’s benchmark Tadawul index this week, the sudden rise in geopolitical tension comes just as the end of the stabilization period for the shares nears.

“The risks will remain over the near term as both the United States and Iran aim threats at one another,” said Jameel Ahmad, a markets analyst at FXTM in London. The drop in Aramco shares “is a natural reaction to the coordinated risk aversion that has swept global sentiment since the events at the end of last week.”

The missile attack that killed Iran’s General Qassem Soleimani in Iraq, ordered by U.S. President Donald Trump, was a reminder of the risks of investing in the region. In September, Saudi Arabia’s oil production was cut by half after a swarm of explosive drones struck some of its most important production facilities. The U.S. and Saudi Arabia blamed Iran for the attack, while Yemen’s Houthi rebels claimed responsibility.

Aramco was back pumping 9.9 million barrels a day just one month after the attacks and the company pressed ahead with what was to be the world’s biggest IPO.

Risk Premium

At the time of the sale, many foreign investors cited geopolitical risk as reasons to stay away from the shares, and considered them too expensive. Even after this week’s fall, Aramco has a valuation of $1.8 trillion, easily the highest among listed companies.

Aramco still has some built-in protection because the shares are mostly in the hands of those used to regional politics, mitigating selling pressure at times of tension. Saudi government institutions invested almost $2.3 billion in the IPO. The government also relied heavily on ordinary Saudis and funds from neighboring Gulf Arab monarchies to ensure the success of the offering.

On top of that, Goldman Sachs Group Inc. is acting as share-stabilizing manager for the offering until the end of this week and can buy shares as part of that. It also has the right to exercise a so-called greenshoe option of 450 million shares, which would normally be used if the stock was rising too fast. No price-stabilization transactions had been executed as of Dec. 31, according to a statement from Aramco.

“Very few active managers are in the stock and most shareholders are either government-related entities, quasi-passive or passive,” said Marwan Haddad, senior portfolio manager at Emirates NBD Asset Management in Dubai. “Therefore volatility would be low unless an actual attack takes place, which we believe has a low probability. Moreover, as the oil price goes up, downside risk falls.”

Bloomberg

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In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

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  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.