Saudi Aramco IPO came up with a lot of fanfare last year. Eventually, it became the world’s biggest listed company even though it could not manage the kind of valuation that the Saudi Arabia government expected a year before the listing. Nonetheless, Saudi Aramco’s market capitalization surpassed tech giants like Apple and Microsoft.
This year, crude oil prices have plummeted. To begin with, the so-called OPEC+ block did not agree to an oil price cut. Last time, when the OPEC did not agree on a production cut in November 2014, crude oil prices had tanked. Back then, China’s slowdown concerns compounded the woes for other commodities and eventually, metals like steel, aluminum, and copper fell to multi-year lows in the first quarter of 2016.
This time, the COVID-19 pandemic compounded crude oil’s woes. Even though OPEC+ agreed to a production cut that had President Trump’s blessings, crude oil prices have not recovered. Currently, the demand side of the equation is so weak that supply cuts might not be sufficient to turn the tide for crude oil prices.
Meanwhile, Saudi Aramco’s stock has outperformed other energy companies this year. Based on yesterday’s closing prices, the stock is down a mere 15%. Among other major companies, BP and Exxon Mobil have respectively fallen 50% and 44%. The price action is even severe for some of the shale oil producers. Many shale producers are staring at bankruptcy if oil prices stay at these levels.
Now, Aramco’s outperformance might be due to its low-cost operations. Also, it does not have much debt on its balance sheet. Companies with low operating and financial leverage tend to outperform in such scenarios. But then, we also need to consider that Aramco is still mostly held by the Saudi Government and has a very low free float or the number of freely tradable shares. Under such a scenario, the price discovery might not be as efficient.
But then, the resilience of Saudi Aramco is the reason Saudi Arabia can take a hard stance in oil production cut talks. The kingdom knows that Aramco would literally be the last man standing in an elongated price war.
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