Aramco’s drop below IPO price deals blow to Saudi economic plan
DUBAI (Bloomberg) --Saudi Aramco shares dropped below their IPO level for the first time as a looming price war in global crude markets battered the outlook for the kingdom’s flagship oil company.
The stock fell as much as 9.4% in Riyadh before trimming losses to close down 9.1% at 30 riyals. That compares with the 32 riyals at which it began trading on Dec. 11. The Tadawul All Share Index retreated 8.3%.
Markets across the Middle East tumbled Sunday after Saudi Arabia ignited an all-out oil price war by slashing pricing for its crude, making the deepest cuts in more than 30 years on its main grades. The declines for Saudi Aramco are a setback for a government that had celebrated last year’s record $29 billion initial public offering as a showpiece of Crown Prince Mohammad bin Salman’s drive to open up the energy-dependent economy.
Aramco’s pricing cuts were the first response to the breakup on Friday of OPEC’s alliance with partners like Russia. Oil plunged the most since 2008 following the failure of the talks.
The outcome of that oil suppliers’ meeting was “an astonishing reversal of what appeared to be a pending production cut” to compensate for lower demand caused by the coronavirus outbreak, said Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai. “Aramco was extremely clear in its prospectus that production decisions are set by the government, not the company. So, this will be the first implication of that clause in Aramco strategy.”
The kingdom plans to increase crude output next month to more than 10 million barrels a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations.
Shares of Aramco, the world’s biggest oil exporter, had largely defied gravity since they were listed, not falling below the IPO price even as the coronavirus led to a slump in crude. As of March 5, the stock had slipped only about 6% this year.
Aramco’s recent performance contrasts with an initial rally of about 20% within the first two days, a surge that boosted the oil giant’s valuation to the $2 trillion Prince Mohammed was seeking. The company’s IPO was central to the prince’s ambitious strategy of generating funds to diversify the economy and wean Saudi Arabia from its dependence on oil.
In the end, the shares were sold mostly to local investors, who were encouraged to buy after foreigners balked at the offering price.
The drop for Aramco on Sunday means more than $400 billion of market value has been wiped out in about three months, compared with a peak market value in excess of $2 trillion that it reached in December.
An index tracking energy shares in Europe lost 5.5% on Friday, the most for a session since June 2016, with major producers such as Total SA, BP Plc and Royal Dutch Shell Plc retreating between 4.9% and 5.9%. In the U.S., Exxon Mobil Corp. dropped 4.8%.
Aramco’s slump could deter the government from selling more shares either domestically or on a foreign exchange, a possibility that Chairman Yasir Al Rumayyan laid out in an interview last month.
Out of 18 analysts tracked by Bloomberg, two have a buy recommendation for Aramco, while there are 12 hold and four sell ratings.
The collapse of the meeting between the Organization of Petroleum Exporting Countries and its erstwhile partners effectively ends the cooperation between the Saudis and Russia that has underpinned oil prices since 2016. Unshackled from the cartel’s restrictions and with budget holes to fill, there is every chance producers will ramp up output. A reduction in the official selling prices, or OSPs, suggests the Saudis are looking to do just that.
“Saudi Arabia is now really going into a full price war,” said Iman Nasseri, managing director for the Middle East at oil consultant FGE.
