Oil Price Move yet to lift Saudi Aramco’s Share Price

Saudi Aramco the blue chip of Saudi Arabia and the world’s largest oil company took a drop in its stride last year post Covid-19 as oil demand slumped and OPEC+ which is led by Saudi Arabia agreed to sharp cut in oil exports by 9.7mmbpd effective May 2020 from an October 2018 baseline (with Saudi output cut from 12.3 mmbpd in March 2020 to 8.5 mmbpd) to shore up and stabilize the oil prices in the international market. In line with this slump in oil prices Saudi Aramco stock price also fell to a low of USD 26.09 on March 15th, 2020 but recovered in the second half of 2020 to USD 36.95 on September 20th, 2020 with reduction of oil export cuts due to improvement in global economic conditions. Since then though COVID impact has been on the decline despite local lockdowns in several countries continue to exist and with the global economic recovery the oil market has been on a steady rise with oil prices recovering by 34% to reach levels of around USD 69 per barrel in the current year. However, Saudi Aramco share price continues to remain subdued at USD36 (ytd of 1.6%) and has not participated in the stock price rally that several Saudi blue chips witnessed due to improving economic conditions and aided further by the liquidity splurge globally in the stock markets. This raises the question of what are the factors holding back the stock price.

For the quarter ended March 31, 2021 net income was SAR78.6bn ($21bn), up 24 per cent year-on-year and higher than analysts’ average estimate of roughly $19bn. Free cash flow was $18.3bn. The company expects capital expenditure to be $35bn in 2021, a figure unchanged from its forecast in March. The management commentary is upbeat if we read: “There are more reasons to be optimistic that better days are coming,” CEO Amin Nasser said in a statement (Bloomberg May 5, 2021).

The upstream business, mainly consisting of oil and gas production, saw earnings before interest and tax rise 6.4 per cent to $40bn. While it was buoyed by higher energy prices, Saudi Arabia’s OPEC commitments meant Aramco reduced crude output during the quarter to an average of 8.6 million barrels a day which is stated to be the lowest in a decade.

Aramco’s consolidated downstream business, which now includes operations of SABIC in which the Company acquired 70% shareholding, swung to a profit as higher commodity prices boosted margins for refined products such as transport fuels and plastics. The downstream activities’ earnings before interest and tax were $4.4bn, compared with a loss of $5bn a year earlier. These activities, which Aramco wants to expand further, posted full-year losses in 2019 and 2020. In the first quarter of 2021, Aramco’s Downstream segment, consumed 43.8% (Q1 2020: 35.5%) of Aramco’s crude oil production.

Are the low output volumes of Upstream business and the poor historical performance of the downstream business the black sheep behind Saudi Aramco share price paralysis is the question? Or will they turn to be the torch bearer of a recovery as global prices of downstream products improve with the global economic revival from the COVID pandemic also aided by higher volumes in Upstream business upon the proposed lifting of OPEC+ crude oil quotas.

This Article is Written by Mr. Venkatram Kolluri, Senior Consultant at Marmore MENA Intelligence