Aramco Shares Plunge 14%, Diminishing Oil Giant Faces Crisis

BREAKING: Saudi Aramco, the world’s largest oil company, has just reported a staggering 14% decline in its shares this year, making it the worst performer among its major competitors. As Western oil giants like Exxon Mobil and Shell see stock rebounds, Aramco’s market value has plummeted by over $800 billion from its peak of $2.4 trillion in 2022, raising alarm bells among investors.

The decline comes amid growing concerns surrounding potential dividend cuts, a looming global oil surplus, and questions about Aramco’s long-term growth compared to its rivals. Investors are increasingly worried about the company’s ability to maintain its status as a crown jewel of state-run oil enterprises.

Industry experts suggest that the market is recalibrating valuations, with Allen Good, a strategist at Morningstar Investment Services, noting that “the market may be resetting valuations lower to align with those of national oil company peers.”

As of now, Aramco’s shares are trading approximately 12% below the price of 27.25 riyals per share from a 2024 secondary offering and nearly 19% lower than its average since its public listing in 2019. This shift is not just a financial hit; it threatens the kingdom’s ability to finance its ambitious economic transformation plan, which heavily relies on Aramco’s performance.

Despite these challenges, Aramco remains the most valuable oil company globally, valued at $1.55 trillion, and continues to offer the highest dividends in the industry. However, analysts project a decline in the company’s second-quarter adjusted net income to about $24 billion, down nearly 20% from last year.

The immediate outlook for Aramco is grim, with Hasnain Malik from Tellimer stating, “For Aramco, weaker oil prices are offsetting higher crude volumes.” The volatility in oil prices has been significant, with international benchmark Brent crude fluctuating from over $80 a barrel earlier this year to below $60 in May, before recently trading below $70 in London.

Investors are also reacting to the reduction in performance-linked dividends, which are projected to total about $85 billion this year, down from $124 billion last year. These cuts come amid a backdrop of increasing production and a global oversupply of oil, raising further concerns about Aramco’s future profitability.

With OPEC+ increasing output and forecasts suggesting the company will soon pump nearly 10 million barrels a day, there is pressure for Aramco to utilize its full production capacity of 12 million barrels a day to generate additional cash flow. The company anticipates freeing up another 1 million barrels a day by the decade’s end, transitioning from crude to natural gas for domestic power generation.

The fiscal situation in Saudi Arabia complicates matters. With crude prices trading below the $92 per barrel threshold needed to balance the budget, there are fears that the government might consider selling more shares in Aramco, potentially exacerbating the downward pressure on stock prices.

As the situation develops, analysts urge caution. No analysts currently hold a sell rating on Aramco, yet concerns about future share performance remain paramount. “The potential overhang from future stake sales is arguably as important for the company’s share price as changes in oil prices and dividends,” said Varun Laijawalla of Ninety One.

Investors and analysts alike will be closely watching the upcoming earnings announcement scheduled for August 5, 2024. The results could provide critical insights into Aramco’s financial health and its strategy moving forward amidst a rapidly changing oil landscape. Stay tuned for updates on this developing story.