Saudi Aramco: Risks to Potential Investors

Saudi Aramco: Risks to Potential Investors

Saudi Aramco is now the world’s largest and most profitable company – valued at $2 trillion company. 1.5% of its stakes went public and are considered an attractive investment. However, investors should beware of several risk factors. First, the company remains fragile to attacks from Iran and its proxies. Secondly, the likely reduction of oil exports to Asian markets could slash the value of the company’s stocks. Finally, Aramco shares are not all gilt-edged.

Largest IPO in history

In 2016, Mohammed bin Salman announced Vision 2030 for modernising the economy and diversifying away from oil dependency. Since then, many touted Saudi Aramco’s long-awaited and multiple-delayed IPO as the centrepiece of the Crown Prince’s ambitious plan.

The banks monitoring the company’s IPO rollout had—before the company went public—predicted the valuation of Aramco would be less than $1.5 trillion. However, when the Aramco listing was rolled out on December 11, 2019, the price surged over ten percent. The initial listing at 32 riyals per share rose to 35.2 riyals. On this very first day, the total value of the company stood somewhere in the $1.88 trillion range. Saudi Aramco, thus, swiftly became the most valuable publicly listed company on earth.

By the end of the first week on the market, Aramco became the largest IPO in history. It also became the world’s first $2 trillion company—a valuation previously proposed under the Vision 2030. Consequently, Aramco has gone overtaken tech giants Apple and Microsoft, and the Chinese e-commerce company Alibaba.

However, considering the geopolitical climate of the region remains essential as it has a direct impact on the production and profitability of Saudi Aramco. Several risks are involved while considering an investment.

Furthermore, the investors should consider whether or not the share price and the company itself have been grossly inflated. If so, whether or not a Hindenburg-type disaster is just around the corner.

Aramco: Vulnerability to attacks

As a state-run oil company, Saudi Aramco is significantly affected by the actions of the government. Therefore, Saudi Arabia’s involvement in the Yemen war and its tension with Iran are both strong factors that can have an affect on the fate of the company.

The ongoing war in Yemen could adversely affect the company’s facilities and, hence, its profitability. Already Aramco facilities at Saudi Arabia’s Khurais and Abqaiq came under drone attacks on September 14, 2019. The material damage of these attacks was in hundreds of millions. Its impact sent shock-waves throughout the Saudi economy. Aramco’s exports dropped by 5.7 million bpd or about 50% of the company’s production. Saudi stocks declined immediately after the attacks. The strong interlink between Aramco and the Saudi economy was on display.

It is worth noting that Yemen’s Houthis claimed responsibility for the attacks. The U.S. and Saudi intelligence assessment, however, blamed Iran—an allegation Tehran categorically denied.

The strikes carried out with only a few drones halved the company’s exports in a single day. What could a more advanced attack on Aramco facilities do to the company’s ability to turn a profit? This is a question that potential investors need to ask.

Furthermore, Iran has been accused of trying to destabilise the region’s maritime industry in recent times. The trend has become more prominent particularly since the U.S.’s withdrawal from the JCPOA, popularly known as the Iran Deal. Tehran’s increasingly unpredictable behaviour could lead to U.S.-Iran confrontation, potentially drawing Saudi Arabia’s involvement as U.S. ally and Iran’s regional rival.

Understandably, Aramco remains fragile to further attacks due to the rising tensions between Riyadh and Tehran. The investors should take note of this, as the company’s stocks might decline due to this fragility.

Further risks

Investor should take into account several other factors that could affect Aramco’s profitability. This includes the slowing demand for oil in Asian markets.

Asian economies have been growing at a slower pace and detoriating Sino-US trade relations has compounded reduced consumption. Consequently, oil consumption too could decline in Asian markets, leading to diminished oil exports to these markets. This could slash the value of the Aramco stocks, as most of Aramco’s exports go to Asia.

Also, the “Risk Factors” section of Aramco’s IPO prospectus features climate change regulation and OPEC decisions in Vienna. The report also includes global crude price, political developments in Asia, operational hazards, past and future litigation, the potential for more armed conflict in the MENA region. Hence, the potential shareholders should exercise caution, as not all these shares are gilt-edged.

However, it is not all negative news for aspirant Aramco investors. According to reports from Bloomberg and others, Aramco is and has been the most profitable company in the world. The company’s 1.5% stakes remain one of the most attractive investments since it went public.

Therefore, Aramco’s overwhelming value is tempting to investors. After all, it became the largest company in the world when it was only one week old on the market.

About Author

Michael Lyons

Originally from Arizona, Michael currently resides in Germany and focuses on European and Middle Eastern International Affairs issues. He received an M.A.I.S. degree from the Diplomatic Academy of Vienna, and a B.A. in Political Science with an emphasis on Foreign Affairs from the University of Arizona's School of Government and Public Policy. He has also studied at the Moscow State Institute of International Affairs (MGIMO) and worked with the Kennan Institute at the Woodrow Wilson International Center for Scholars in Washington, D.C as well as other U.S. and European Think-tanks.