What can investors expect from Saudi Aramco after blockbuster secondary stock sale?

Saudi Aramco's strategic shift in its investor base, as demonstrated by the post allocation status of its secondary stock offering, is a significant development that underscores the energy giant’s adaptability and potential for growth.

This shift, which saw foreign investors being allocated nearly 60 per cent of the company’s $11.2 mega-offer, is a stark departure from its 2019 IPO, where local and regional investors dominated. The diversification in the Aramco investor base has led to positive market movements.

The offer attracted participation from over 400 funds, including 125 new international investors, further signaling the growing interest in Aramco's stock.

It's about the dividend yield

Global investors have looked past the ongoing volatility in global oil markets and jumped on the secondary sale offering from Aramco. The number one reason continues to be the lucrative dividend yield offered. As per the latest estimates, the stock's annual cash dividend payout would come near the $120 billion range.

Percentage-wise, Aramco’s 6.6 per cent yield is one of the highest in this sector. This nearly matches what the Italian energy company ENI Spa offers. The US and UK energy giants, including BP and Shell, have dividend yields in the range of 3.9-4.6 per cent.

Another big plus when it comes to Aramco is the state-backed sovereign guarantee. Investing in oil company shares is a matter of significant volatility as private entities often tend to reduce or clamp down on dividends during times of turmoil. Likewise, these companies could also scale back on ambitious capex plans during sector volatility.

With Aramco, the company is a critical base for the Saudi economy. Despite the ongoing diversification drive, the company’s 2023 revenue was $440 billion, which makes up nearly 40 per cent of the Kingdom’s GDP. Due to its criticality to the economy, the company would always see some incremental investment in capex and even on the broader production capacity plans.

Saud Arabia’s fiscal breakeven

According to the latest IMF estimates, the Kingdom now requires an average oil price breakeven point of over $90 a barrel to balance its budget (based on the Kingdom's crude oil output in the 9.3 mbpd range). This stresses the need for Saudi Arabia to hold its output steady and even go for production cuts should oil prices fall sharply.

In such a scenario, investors should note that the overall energy market dynamics would cause a broader fall in stock prices for even the bigger energy players from the developed markets. Recently, Aramco set its July OSP for Asia at a premium of $2.4 to the Dubai/Oman average. This marked a nearly 50 cent decline in the June OSP premium.

One of the key positives for Aramco is the growth of the Kingdom’s non-oil economy. The non-oil economy, valued at nearly $453 billion in the latest 2023 figures, is almost on par with annual Aramco revenues. This growth is largely driven by the Kingdom's receipt of private sector investments worth $250 billion.

Further robust growth in the non-oil private economy would reduce the pressure on the company to finance further expansion-driven expenditures, thus enhancing its long-term investment appeal.