Saudi Aramco has long been the world’s biggest oil company, but this year it gained the distinction of having the worst-performing shares among its peers.
While Western oil majors saw a rebound in their stock prices, Aramco has slumped 14%. The company has outstripped losses in the broader Saudi stock index and plumbed depths not seen since the coronavirus pandemic.
Investors have a variety of concerns — a dividend cut, a looming global oil surplus, lack of long-term growth versus competitors — that suggest Aramco’s status as the crown jewel among state-run oil companies is diminishing. Aramco declined to comment.
“National oil companies typically trade at discounts to Western integrated oils, Aramco was the exception,” said Allen Good, a strategist at Morningstar Investment Services, which has a hold recommendation on the stock. “The market may be resetting valuations lower to align with those of national oil company peers.”
It has been a stunning slide for Aramco, which has lost more than $800 billion of market value from its peak of almost $2.4 trillion in 2022. The kingdom and its wealth fund still own 98% of the company, so the slide would affect how much money they could raise from any further shares sales, a potentially key source of income for Saudi Arabia’s economic transformation plan.
Aramco currently trades about 12% below the 27.25 riyals per share price of a 2024 secondary offering, and about 19% less than its average value since listing in 2019.
Even so, Aramco is still the world’s most valuable oil company at $1.55 trillion and continues to pay the highest dividend in the industry. Its balance sheet is robust, giving it plenty of scope to keep raising debt to help finance growth when cash flow falls short. None of the analysts covering Aramco have a sell rating on the stock, according to data compiled by Bloomberg.
Since its initial public offering, investors have typically put Aramco at a premium to its peers because of its high-quality and low-cost assets. The company has among the largest oil reserves and says its cost of production, including investment, is just under $12 a barrel, while the average for international oil companies is nearly $28.
In mid-2022, as energy prices boomed after Russia invaded Ukraine, Aramco’s price-to-earnings ratio was more than twice that of the average for the MSCI World Energy Sector Index, which includes Western oil majors such as Exxon Mobil Corp. and Shell Plc. More recently this premium has eroded.
The volatility seen in oil prices this year has been a major factor. International benchmark Brent crude has swung from more than $80 a barrel in January to below $60 in May as the Organization of Petroleum Exporting Countries and its allies, of which Saudi Arabia is the leading member, boosted production just as US President Donald Trump launched his trade war. It was back above $80 a barrel in June as Israel and the US went to war with Iran, and is currently trading below $70 in London.
“For Aramco, weaker oil prices are offsetting higher crude volumes,” said Hasnain Malik, Dubai-based head of equity strategy research at broker Tellimer.
The company’s second-quarter adjusted net income is expected to decline to about $24 billion when the company announces earnings on Aug. 5, according to analysts estimates compiled by Bloomberg. That’s about a fifth lower than the earnings the company reported a year ago.
Investors aren’t just considering oil prices and profits, they are also reacting to the loss of most of the performance-linked dividend they received in 2024. While Aramco forecasts further growth in its base dividend, the overall payout will still be smaller — about $85 billion this year, down from $124 billion last year.
Even with this sharp reduction, dividends exceeded free cash flow by almost $2 billion in the first quarter. The company is expanding its borrowing to fund the gap, something it can do comfortably with gearing — the ratio of net debt to equity — of just 5% at the end of March, compared with 19% for Shell.
Aramco’s base dividend looks sustainable, but “without much higher oil prices, that payout won’t return” to last year’s levels, said Morningstar’s Good. “Valuation may need to settle at a lower level to ensure the base payout yields a competitive return.”
Investors are also questioning the growth potential of Aramco. With international rivals like BP Plc and Shell rolling back some of their green targets to refocus on oil and gas, and producers like Exxon Mobil continuing to invest in increased output in the Americas, non-OPEC+ producers are expected be the source of most of the world’s incremental supply gains through to 2027.
OPEC+ is currently increasing output, and by September Saudi Arabia will be able to pump almost 10 million barrels a day, up a million barrels a day from April. Aramco will still be producing well below its full potential of 12 million barrels a day.
The company says producing and selling the capacity it’s currently keeping idle could unleash tens of billions of dollars in extra cash flow. By the end of the decade, it expects to free up an additional 1 million barrels a day of oil output for export as it replaces crude burned to generate power at home with natural gas or renewables.
The fiscal outlook for Saudi Arabia, which is running a deficit with crude trading well below the $92 a barrel that the International Monetary Fund estimates the government needs to balance its budget, creates another risk for Aramco shareholders — that the government could sell more shares in the company.
The kingdom raised more than $12 billion in a secondary sale of Aramco stock just over a year ago. Shares dropped about 2% in the week following the close of the secondary offering and fell below the offer price of 27.25 riyal in early August of 2024. Since March this year, the shares have been consistently below the offer price.
“Only 2% of shares outstanding are publicly traded,” with the remainder being held by the Saudi state and sovereign wealth fund, said Varun Laijawalla, emerging markets equity portfolio manager at London-based Ninety One. “The potential overhang that exists from future stake sales” is arguably as important for the company’s share price as changes in oil prices and dividends, he said.
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