Why the World’s Largest Company Is a Second-Class Stock

High oil prices benefit Saudi Aramco — and even more so for the Saudi government.

The conflicting preferences made most international shareholders reluctant to go public in 2019 of Saudi Arabian Oil Co. was fully reflected in Sunday’s strong financial results. Minority shareholders are right to worry that their interests are second to the interests of the majority-holding state.

Global oil prices at around $100 per barrel helped Aramco generate a profit of $39.5 billion and a 27.2% return on average capital employed in the first quarter. Like its international rivals, the company paid dividends, wrote off debt, and rewarded shareholders a bit. Unlike other companies, it will dramatically increase capital spending — from $31.9 billion last year to $40 billion to $50 billion this year.

For Aramco’s minority shareholders, Brent oil prices of just under $100 a barrel represent a good point. Royalties Aramco pays the state based on the value of their oil production increasing as Brent rises: 15% when oil prices are below $70 a barrel, 45% for marginal values ​​above $70 and below $100 , and 80% on anything over $100. So most of the value over $100 a barrel goes to the Saudi government. Expensive crude also increases the risk of users cutting back or switching to substitutes, permanently reducing demand in the long term.

The Saudi controlling shareholder’s financial interest in keeping prices high may help explain the company’s behavior during the energy crisis caused by Russia’s invasion of Ukraine. Oil prices have risen and remain volatile amid concerns that the world could lose significant amounts of Russian exports. As a global swing maker, Aramco could lower the benchmark, but it doesn’t. It has a maximum sustainable capacity of 12 million bpd but produced only 10.3 mbpd in March, according to the Initiative Data Foundation.

It may take time for Aramco to open the taps, but Aramco’s 2.7% increase in oil production in the first quarter looks rather modest. The company increased production from 9.7 million bpd in March 2020 to 12 million bpd in April 2020 during a difficult time with Russia that briefly dropped crude oil prices below zero. Western officials have lobbied for Riyadh to produce more, but Saudi Arabia stuck to OPEC’s current plan to only increase output gradually. There is a valid risk that China’s Covid-19 lockdown reduces global oil demand. However, Aramco’s decision also kept prices high, filling state coffers and avoiding offending Moscow, a key partner in maintaining cooperation and discipline within the Organization of the Petroleum Exporting Countries.

Shares of Aramco have risen by nearly a third this year, restoring the Saudi company’s position as the world’s largest public company by market value but falling behind Shell.,

Exxon Mobil and Chevron.

The stock is still relatively expensive, trading at a business value of about eight times earnings before interest, taxes, depreciation and amortization. The US’s rivals changed hands about five times and the Europeans about three times.

Operationally Aramco could be a good oil machine, but for any investor other than the Saudi state, that’s still a bleak outlook.

The dynamics that have driven Aramco’s growth from a driller to the largest oil producer in the world are slowly changing. Now that the company has sold stock, can it sustain the growth it needs to keep investors happy? Photo: John Moore/AP (First published January 31, 2020)

Write letter for Rochelle Toplensky at rochelle.toplensky@wsj.com

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https://www.wsj.com/articles/why-the-worlds-largest-company-is-a-second-class-stock-11652709531?mod=rss_markets_main Why the World’s Largest Company Is a Second-Class Stock

Edmund DeMarche

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