Technically, there is nothing unreasonable about Aramco’s valuation, which currently stands at over $2 trillion, making it the world’s third-largest public company. After all, willing buyers and sellers set the price transparently on the exchange. This is how companies are valued in a capitalist system.
The problem is the quality and breadth of this price discovery. Aramco’s stock liquidity is abysmal: A daily average of just $51 million of shares changed hands over the past year, according to data compiled by Bloomberg. Compare that to nearly $2 billion for Exxon Mobil Corp. For Apple and Microsoft, the figures are $11.2 billion and $7.5 billion, respectively.
It’s not just that Aramco’s liquidity is low, with just 2% of shares available for trading, that’s no surprise, but it’s also problematic that so many buyers and sellers are involved in what looks like a merry-go-round. Middle Eastern investors, often controlled by regional or royal governments, trade with each other, back and forth. Large institutional investors are absent. And don’t waste your time looking for short sellers – they don’t exist.
By selling more shares, the Saudi government can improve liquidity. For this, however, investors must actually trade the stock. Since its IPO in 2019, many investors have treated it as a buy-and-hold investment, similar to a perpetual bond.
Aramco managers are aware of the problem. “We recognize that the average trading volume compared to a stock of our size is not high,” Ziad Al-Murshed, the company’s chief financial officer, told investors on a conference call earlier this month. “A lot of it is not under the direct control of the company. Many of the shareholders own the stock, so the trading volume is not too high.”
Recognizing a problem is the first step to solving it. But what to do? A new market-making mechanism, introduced by the Saudi stock exchange, may help margins. The only real solution, however, is to attract the interest of the vast amount of foreign capital that buys and sells oil stocks in places like London, Hong Kong and New York. This, however, is not practical at the current stratospheric valuation.
Simply put, Aramco isn’t worth that much to sophisticated international investors. That’s why most of them skipped the 2019 IPO at an even lower valuation, and why they’re likely to approve once more if Riyadh goes ahead with its plan.
In an emailed response to questions, Aramco said the low liquidity is not deterring investors. “On the contrary, we believe there is a strong appetite for what Aramco has to offer,” he said, adding that it provided investors with “unparalleled profitability, cash flow and profitability.”
Aramco trades at a price-to-earnings ratio of 13.5 times, nearly double that of Exxon. By mid-2021, the ratio reached nearly 40 times. Those are numbers better suited for a moonshot tech stock, not an old oil company. The other consequence of a high P/E ratio is a low dividend yield. At its current valuation, Aramco offers just 3.8%, compared with nearly 4.5% for BP Plc.
In addition, investors can earn up to 4.6% by buying two-year dollar-denominated Saudi government debt, and 5.5% on the 30-year sovereign bond. Equity ranks below debt in any capital structure; why would a foreign investor accept a lower return with a riskier exposure to Saudi Arabia?
The Saudi government is trying to attract more investors for Aramco by leveraging dividends. Buybacks, Big Oil’s preferred way to return capital to shareholders, are not an option for Riyadh, as they would further reduce the free float of the shares. With profits rising and cash on hand, Aramco pledged earlier this month to supplement its regular dividend with a so-called “performance” dividend, equal to 50% to 70% of its cash flow of annual free cash, net of the base dividend and other expenses.
The extra cash would boost the dividend yield, or so Aramco hopes. Even so, it is unlikely to convince foreign money. Foreign investors have better options, starting with the country’s hard-currency sovereign debt. If an overseas portfolio manager wants to speculate on a combination of the oil economy and Saudi political risk, these government bonds are a more lucrative and safer investment than the domestic oil company.
More from Bloomberg Opinion:
• Saudi Arabia can’t win the fight with oil short sellers: David Fickling
• What Exxon Won’t Say About Climate Costs: Gongloff and Denning
• Chevron adds a piston to its US Oil Shale engine: Javier Blas
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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