The world's largest oil producer, Saudi Aramco, is trying to lure global investors with a $12 billion stock sale. However, the high price of the shares could be discouraging.
The Saudi national oil company will offer shares worth up to $12 billion this week. The Saudi government, which will still own over 80% of Aramco after the sale, plans to use the proceeds to fund the country's Vision 2030 initiatives. These projects, such as the futuristic desert city Neom, aim to diversify the Saudi economy away from dependence on oil, but have so far not attracted the expected foreign capital.
When Aramco went public in December 2019, investors in New York and London largely stayed away. With a valuation of $1.7 trillion, the price seemed high and investors found better value elsewhere. At the time, Shell and BP offered a dividend yield of over 6%, compared to Aramco's 3.85%.
Due to low demand, plans for a dual listing on a major international stock exchange were abandoned. Foreign investors purchased only 15% of the $29.4 billion initial public offering on the domestic stock exchange in Saudi Arabia. One-third of the offering went to local retail investors, who received benefits such as one bonus share for every ten shares they held for at least 180 days.
Local retail investors will receive only a tenth of the latest offering. Aramco hopes to attract international funds this time with an increased dividend. After introducing a new performance-based payout last year, the company’s dividend yield currently stands at 6.2%, better than that of Chevron or Exxon Mobil.
However, Aramco still appears more expensive than Western supermajors in other valuation metrics such as the price-earnings ratio and free cash flow yield. This valuation premium could dampen returns, as has been the case since the IPO. Including dividends, Aramco shares have achieved annual gains of 4% since the end of 2019, compared to 18% for Exxon and 14% for TotalEnergies.
It entered the market with a very high rating and is still growing," says Neil Beveridge, analyst at Bernstein.
Aramco shareholders missed out on the price rallies and high distributions that other major oil companies achieved after the Russian invasion of Ukraine in 2022. Aramco's total dividends remained at 75 billion dollars that year, while Exxon Mobil doubled its distribution to shareholders.
The Saudi government nonetheless benefited greatly from the high oil prices in 2022. The royalties paid by Aramco to Riyadh more than doubled, as these fees increase with the oil price.
With a new policy, Aramco's dividend could exceed 120 billion dollars this year. Currently, the interests of Aramco's minority shareholders and the Saudi government seem to align, as both want to return more money to the owners.
Aramco's Free Cash Flow Does Not Cover Its Dividend
With around three million barrels of oil per day in reserve capacity, Aramco is the most important tool for the Saudi government to keep energy prices at the desired level. According to the International Monetary Fund (IMF), Riyadh needs to keep oil prices near $100 per barrel to balance its budget. This goal proves elusive, and the extension of production cuts at Aramco cedes market share to its rivals outside of OPEC.
This adds another layer of complexity for Aramco that investors do not have to consider with international oil companies like Chevron or Shell. The company "is essentially an arm of the Saudi state and has an additional mission beyond maximizing returns," says Jim Krane, an energy economics expert at Rice University.
The higher dividends from Aramco might not attract as much foreign capital as the kingdom hopes.
