Aramco drops below IPO price in blow to Saudi economic plan

RIYADH: Saudi Aramco shares dropped below their IPO level for the first time as a looming price war in global crude markets battered the outlook for the kingdom’s flagship oil company.

The stock fell as much as 9.2% in Riyadh to trade at 29.95 riyals, compared with the 32 riyals at which they launched on Dec 11.

It trimmed losses to 8.6% as of 1.20pm local time, while the benchmark Tadawul All Share Index lost 8.1%. Trading in Aramco shares will be suspended if they fall 10%.

Markets across the Middle East tumbled Sunday after Saudi Arabia ignited an all-out oil price war by slashing pricing for its crude, making the deepest cuts in at least 20 years on its main grades.

The declines for Saudi Aramco are a setback for a government that had celebrated last year’s record US$29 billion initial public offering as a centerpiece of Crown Prince Mohammad bin Salman’s drive to open up the energy-dependent economy.

Aramco’s pricing cuts were the first response to the breakup on Friday of OPEC’s alliance with partners like Russia. Oil plunged the most since 2008 following the failure of the talks.

The outcome of that oil suppliers’ meeting was “an astonishing reversal of what appeared to be a pending production cut” to compensate for lower demand caused by the coronavirus outbreak, said Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai.

“Aramco was extremely clear in its prospectus that production decisions are set by the government, not the company. So this will be the first implication of that clause in Aramco strategy.”

The kingdom plans to increase crude output next month, looking to boost it well above 10 million barrels a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations.

Shares of Aramco, the world’s biggest oil exporter, had largely defied gravity since they were listed, not falling below the IPO price even as the coronavirus led to a slump in crude. The stock had slipped only about 6% in 2020.

Aramco’s recent performance contrasts with an initial rally of about 20% within the first two days, a surge that boosted the oil giant’s valuation to the US$2 trillion sought by Crown Prince Mohammed Bin Salman.

The company’s IPO was central to the prince’s ambitious strategy of generating funds to diversify the economy and wean Saudi Arabia from its dependence on oil.

In the end, the shares were sold mostly to local investors, who were encouraged to buy after foreigners balked at the offering price.

“There will be pressure today, definitely, and we could see some sort of support being put into the stock or to the sector in particular,” Marie Salem, the head of institutions at Daman Securities, said in an interview with Bloomberg TV.

An index tracking energy shares in Europe lost 5.5% on Friday, the most for a session since June 2016, with major producers such as Total SA, BP Plc and Royal Dutch Shell Plc retreating between 4.9% and 5.9%. In the US, Exxon Mobil Corp dropped 4.8%.

Aramco’s slump could deter the government from selling more shares either domestically or on a foreign exchange, a possibility that Chairman Yasir Al Rumayyan laid out in an interview last month.

Out of 18 analysts tracked by Bloomberg, two have a buy recommendation for Aramco, while there are 12 hold and four sell ratings.

The collapse of the meeting between the Organisation of Petroleum Exporting Countries and its erstwhile partners effectively ends the cooperation between the Saudis and Russia that has underpinned oil prices since 2016.

Unshackled from the cartel’s restrictions and with budget holes to fill, there is every chance producers will ramp up output. A reduction in the official selling prices, or OSPs, suggests the Saudis are looking to do just that.

“Saudi Arabia is now really going into a full price war,” said Iman Nasseri, managing director for the Middle East at oil consultant FGE.