Matthew’s view
The stock market seems to have soured on Saudi Aramco dragging its shares to the lowest levels on record. Yet Wall Street analysts overwhelmingly say the state-controlled oil giant is a buy. Who is right will have big implications for the kingdom.
Research teams at 13 of the 19 banks that actively follow Aramco have a buy rating, including Bank of America, Citigroup, Goldman Sachs, and JPMorgan. None recommend investors sell the stock. Price targets range from 25.4 riyals ($6.77) to 34.7 riyals a share. Even the low end of that range suggests a nearly 7% upside for anyone taking that advice.
The analysts’ bull case centers on Aramco’s proven ability to maintain its dividend, even if it doesn’t generate enough cash to pay it. The company will shell out $42.3 billion in the first half, borrowing to put a floor on returns. Excess cash from its investments in gas production, an upswing in oil prices, or monetizing its assets via structures like last month’s $11 billion deal with BlackRock, offer potential upside.
Some definitely agree with that outlook. Foreign investors now own about a quarter of Aramco’s stock that is available to trade (the majority is owned by the government). Traders tell me there are foreign investors boosting exposure or buying into Aramco for the first time.
Clearly, not everyone is convinced. The Saudi government needs cash now to plug its deficit and pay for its economic transformation, and Aramco is likely among the first spots for Riyadh to raid. The stock’s 15% slump this year, deeper than the broader index’s 11% slide, is as much a reflection of weak oil prices as it is concern about how the state will handle vast spending commitments when crude is lower.
Big local shareholders seem to be content to offload Saudi equities to foreigners, which should give anyone with knowledge of the local market some reason to pause. While Aramco’s base dividend seems secure, other global oil companies offer better returns.
Markets are supposed to be taking a view on future earnings — and oil revenue still makes over half of Saudi government income — which means the slump in Aramco’s share price is not just a bad sign for the company, but for the wider Saudi economy.
Policymakers in Riyadh will be hoping that Wall Street analysts are better at predicting the future than investors.
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Room for Disagreement
Aramco is a huge client for many of the world’s biggest investment banks. Not only that, it is intimately entwined with the Saudi state. The potential for analysts to feel pressure to paint a rosy picture to help their colleagues win work on deals is high. Especially as the Saudi government has said it wants to sell down more of its stake in the future. That was one of the issues that arose during the company’s 2019 IPO when analysts struggled to match the expectations of their client with the realities of global markets.
Notable
- Saudi Aramco is better as a bond than an equity investment, argues Bloomberg’s energy and commodities columnist Javier Blas.
- Aramco is still the key driver of Saudi government revenue despite the rise in non-oil income, according to this analysis by Tim Callen and Justin Alexander for the Arab Gulf States Institute.