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Saudi Aramco is an attractive company to invest in

The foundation of one of the largest companies around the world, Saudi Aramco, was in

1933 (Zippia, n.d.). Back then, the Saudi government decided to offer an opportunity to the

foreign oil companies that were interested in the chance of finding a new production line. The

franchise was given to California Arabian Standard Oil Company -CASOC- and it took them

five years of searching around the country to start the first commercial production in 1938

(Moeller & Weijermars, 2020). Since then, no company was allowed to drill for oil within the

Saudi borders, giving the advantage to both partners in this cooperation. Forty years later, the

Saudi government started to show an interest in the company by raising the percentage of their

ownership to 25% until the late 1970s, where the Company was 100 percent state-owned, and to

be renamed in 1988 to Saudi Aramco as it is today (Moeller & Weijermars, 2020). Aramco is

offering different kinds of products such as crude oil, refined oil, and natural gas. Moreover,

Aramco has almost 96 thousand employees that are been managed from headquartered in

Dhahran, Saudi Arabia (Zippia, n.d.). Aramco company was kept private until December 2019,

where The IPO was launched with a market value near 1.8 trillion dollars (Croft, 2021). One

opinion is believing that investing in Saudi Aramco could bring a huge returns to the investors

over the long term. However, others are not seeing a profitable opportunity with such a company

comparing to its competitors from the renewable power field. Investors should invest in Aramco

due to the stability of its share price, and to catch some of the expected profit once the company

lowers its money supply to the Saudi government.

A major reason that could support the idea of investing in Aramco is the small fluctuating

range of its share price. Since day one of the stock in Tadawal, the Saudi exchange market,
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where the price was set at 32 riyals, the stock had been through decreases that never reached

15%, and increases that are raising the stock almost 20% overall (Argaam, n.d.). Several factors

are backing up this kind of control over the price. According to Croft (2021), the government

encourage the Saudi individual investors to hold their Aramco stocks by promising an additional

stock of each ten that had been kept for six months. This indicates that lowering the stock supply,

which can not do but raise the price along with the demand increase, is a way that had been

encouraged by the owners. Another factor is the limited short orders on Aramco stock. The short

order is borrowing stocks that are not yours to sell it at the market price right now. After a while

and as your indicators told, the stock price dropped leaving to you the chance to buy it again and

keep the profit while returning the stocks to the lenders. However, the case in Tadawal stocks

can be complicated even if shorting orders are allowed. There is not enough amount of stocks to

be lender while the idea of the short is against an Islamic rule that requires the full ownership of

any commodity to be sold (Brandon, 2019). This suggests that Aramco stock is not under a lot of

pressure that could affect its price negatively. The stability of Aramco's share price could be a

great incentive to invest in the stock.

Another supportive reason to invest in Aramco is to get profit when the company ledgers

are separated from the Saudi government budget. Aramco has been funding the Saudi

government for the past 80 years, and the financial statements of that funder were exposed for

the first time back in 2016 along with the announcement of going public. The annual cash flow

from Aramco to the Saudi government (see Table 1) is an average of 150 billion dollars a year

divided into royalties, dividends, and income taxes. This could show the huge stress on Aramco's

ledgers due to these amount of payments, which can significantly decrease if the Saudi

government budget stands on its own.

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Table 1

Saudi Aramco payments to the Saudi Government in billion USD

Note. Reprinted from "Saudi Aramco Privatization in Perspective: Financial Analysis and

Future Implications" by J. Moeller, & R. Weijermars, 2020, Journal of Finance and Economics,

8(4), p. 1. Copywrite 2020 Ruud Weijermars and Jonathan Moeller.

Fortunately, the decrease of the need for these payments is on process, and it is being illustrated

by the plans of Vision 2030. A major move towards the country vision is by creating efficient

stable sources of income for the government. According to Aya (2021), the purpose of Saudi

Aramco IPO is to raise capital for the Public investment fund PIF to build a diverse reliable

income for the government instead of an annual budget that is been determined by oil prices.

This suggests the seriousness of the government towards its vision by turning the money raised

from the IPO into the PIF accounts. Additionally, Aramco's shares are returning under 5%

compared to smaller oil companies that return almost 7% (Croft, 2021). That could illustrate the

chance in front of the investors before the stock price increase along with the plans accomplish.

Aramco is in toward becoming an independent company, which could be a sign of proper

investment.
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Investors should probably invest in Saudi Aramco because of the slight fluctuate of its

share price, and because of the large profits that are coming once the corrections end

successfully. One implication is that even if the stock price is nearly constant, the investors

should be ready to stake more of the shares once the price level is lower than usual. Moreover,

non-Muslim investors are in a very beneficial position, where they can lend their stocks easily in

a market that demands more than what is being supplied. Another implication is that the amount

of cash that Aramco is willing to pay each year, which is estimated to be 150 billion dollars a

year, could make a point of view about the size of reserves Aramco holds. Thus, investors could

consider this power represented by Aramco assets in their investing criteria. Additionally, even if

the process of separating Aramco from the Saudi government could raise the level of the

company's independence, Saudi Aramco can get the benefit of being part of the country's

transformation towards its vision. Once the vision is achieved, Aramco's market value could

increase along with the praise headlines. The Saudi government should release to the public

more of Aramco's historical financial statements to raise the level of transparency with the

investors. If Saudi Aramco increases its investments in the sustainable energy field, then Aramco

investors should not be worried for the next decades about losing their capital due to the

international movement towards the new energy generation.

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References

Aya, B. (2021, October 6). Saudi Aramco closes near $2T valuation as oil prices rally. ABC

News. Saudi Aramco closes near $2T valuation as oil prices rally - ABC News (go.com)

Brandon, K. (2019, December 27). After Aramco's record IPO, traders now ask how to short

shares. Bloomberg. After Aramco’s Record IPO, Traders Now Ask How to Short Shares -

Bloomberg

Croft, A. (2021, August 26). Saudi Aramco is the world’s most profitable oil giant. For

investors, it’s one big yawn. Fortune. Saudi Aramco is the world’s most profitable oil giant.

For investors, it's one big yawn | Fortune

Moeller, J., & Weijermars, R. (2020, July 6). Saudi Aramco Privatization in Perspective:

Financial Analysis and Future Implications. Journal of Finance and Economics, 8(4), 1-

2. Saudi Aramco Privatization in Perspective: Financial Analysis and Future Implications

(sciepub.com)

Zippia (n.d.). Working at Aramco. Working At Aramco: Employee Reviews and Culture (zippia.com)
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Argaam (n.d.). Saudi Arabian Oil Company. Saudi Arabian Oil Company | Saudi Aramco |

TADAWUL | TASI | Argaam