Saudi Aramco’s Big IPO Looks To Add Agreements And Increase Production

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In December of 2019, Saudi Aramco listed shares on a public exchange to monetize Saudi Arabia’s largest state-owned company. Shares were listed in Saudi Arabia as the initial value, provided by US analysts was less than the company desired. Subsequently, Saudi Aramco reported that the netted an additional $3.8 billion from its record initial public offering as it sold more shares to meet investor demand. The company currently has a market valuation of $1.856 trillion.

Saudi Aramco IPO

Saudi Arabia’s largest company which is state owned oil giant listed on a local exchange in December after selling 3 billion shares at 32 Saudi riyals each to raise $25.6 billion. The company allocated 450 million more shares to investors to support the price for a month in the market. In January an extra $3.8 billion from the Aramco IPO was provided to investors to monetize the capital in the company which provides more cash to spend domestically and boost the Saudi Arabian economy.

Oil Volatility Weighs on Saudi Economy

Oil prices continue to remain volatile. During the Q3 of 2019, oil prices dropped from approximately $58 per barrel to $52 per barrel. Historical oil volatility as reflected by the OVX, which measures the volatility of the “at the money” strike prices of WTI crude oil, shows that oil volatility is generally around 30%. The OVX is very similar to the VIX volatility index and is measured in a similar way. The OVX is hovering above 30% but has reached a high of 75% in 2019. This means that trader’s during 2019 thought that oil prices could move as much as 75% from the current levels.

During the Q3 of 2019, the Saudi economy contracted 0.46% year over year follow a decline in oil prices, according to official statistics. The contraction in growth came as the government initiated reforms that have helped boost non-oil growth, such as issuing tourist visas for the first time.

To help reduce the effects of volatile oil prices the Crown Prince Mohammed wants his sovereign-wealth fund, to use the Aramco IPO proceeds to invest domestically in new non-oil industries. Cash would be taken from Saudi Aramco and transferred actively, so economic output isn’t beholden to oil-price swings. What is clear is that Saudi Aramco is a piggy bank for Saudi Arabia, but the rulers of the state want to diversify their holding, so the country does not experience the ups and down of oil volatility.

Attack on Saudi Fields Remains a Concern

In addition to experiencing the volatility in oil prices, investors in Saudi Aramco will be subject to tensions withing the Gulf. In September, Saudi Arabia’s largest oil field was attacked by Iran according to reports. Several projectiles struck the Abqaiq plant, starting a series of fires that quickly took out nearly half Saudi’s oil production, which analysts believe makes up 5% of the global daily output. The strike generated a surge on oil prices, but prices quickly eased in the following weeks.

Houthi rebels in Yemen claimed the attack, saying that 10 drones had targeted Abqaiq, as well as the Khurais oilfield. But analysts said that attacks of this scale and accuracy would represent a sudden and remarkable increase in Houthi capabilities, making it clear they needed help to take on this endeavor. Most of the Houthi attacks over the prior two years either missed their targets or were shot down which led to the believe from Saudi Arabia and the United States that this attack was different. Houthi drones are based on Iranian models, themselves often developed from North Korean technology.

In the Wake of the IPO

Now that Aramco is public, the company is searching for partners to enhance its revenue. One of the first agreements has come with the State of Kuwait. The two countries signed an accord with the goal of increasing production in the region. This comes in the wake of a recent OPEC agreement to help buoy oil prices. In December, the 14-member cartel, which is known as OPEC+ and includes Russia, agreed in principle to reduce output by an additional 500,000 barrels per day.

At the conclusion of the meeting there were still many questions including how the quota would be allocated, and how long the agreement would extend. OPEC said it would meet again on March 5-6. The cartel typically meets every six months, so the announcement had led some on the Street to believe the increased cut would only extend through the first quarter.

The IPO is likely to bring in huge sum of revenue to Saudi Aramco which is looking to monetize it ability to product low cost oil. The key to their success will be to extend its reach with partnerships as well as reduce the volatility in revenue production as oil prices remain volatile.

2 thoughts on “Saudi Aramco’s Big IPO Looks To Add Agreements And Increase Production

  1. It took a longtime for the Saudi Aramco IPO to come to fruition. It’s an interesting play and I’ve always been fascinated by the pricing control in the oil market. Right now, Exxon Mobile is at the top of my watch list to buy.

    • Hi BK,

      The entire oil sector has taken a severe beating in recent weeks. I’m sure you will find a lot more opportunity in the oil patch besides XOM.

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