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06 January 2020

Saudi Aramco undergoes first stern test after IPO amid geopolitical tensions

At the time of the public share sale, many foreign investors and analysts cited geopolitical risk as reasons to stay away from the shares and considered them too expensive.

The rising US-Iran tensions are a reminder of the September 2019 attacks on Saudi Aramco oil facilities/Bloomberg

Saudi Aramco’s status as an oil-producing behemoth located in one of the world’s most turbulent regions always marked it as likely to suffer spells of volatility but few could have expected the stock to face a stern test less than a month after the company’s historic $25.6 billion initial public offering (IPO), reported Bloomberg.

The world’s most profitable company tumbled 1.7 per cent, the most in more than two weeks, as the intensifying US-Iran tensions are triggering fresh concern of a wider conflict in the Gulf region. While Saudi Aramco performed better than Tadawul, the sudden rise in geopolitical tension comes just as the end of the stabilisation period for the shares nears following the 11 December 2019 sale.

The mounting US-Iran tensions are a reminder of the risks of investing in the region. In September 2019, Saudi Arabia’s oil production was cut by half after a drone attack on the Kingdom’s oil and gas production facilities.

Saudi Aramco was back pumping 9.9 million a day just one month after the attacks and the company pressed ahead with what was to be the world’s biggest IPO.

The state-owned energy giant still has some built-in protection because the shares are mostly in the hands of those used to regional politics, mitigating selling pressure at times of tension. Saudi government institutions invested almost $2.3 billion in the IPO. The government also relied on ordinary Saudis and funds from neighbouring oil-rich Gulf allies to ensure the success of the offering.

Similarly, Goldman Sachs Group is acting as share-stabilising manager for the offering until the end of this week and has the right to exercise a so-called greenshoe option of 450 million shares. According to Saudi Aramco, no price-stabilisation transactions had been executed as of 31 December 2019.

“Very few active managers are in the stock and most shareholders are either government-related entities, quasi-passive or passive, therefore volatility would be low unless an actual attack takes place, which we believe has a low probability. Moreover, as the oil price goes up, downside risk falls,” said Marwan Haddad, Senior Portfolio Manager at Emirates NBD Asset Management.


RELATED STORIES: US-Iran tensions IPO Saudi Aramco Goldman Sachs Group





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