As you might imagine, shares of Saudi Aramco have retreated in the wake of the US drone strike that killed legendary Iranian commander Qassem Soleimani.
Crown Prince Mohammed Bin Salman’s pet IPO has now reversed well more than half of the post-public rally.
The trajectory for shares of the world’s most profitable company is “not good, not good”, to employ a Trump-ism.
On Wednesday, following Iran’s counterstrikes on US positions in Iraq, Aramco fell for a fourth consecutive day. At one point, it had wiped out nearly two-thirds of the IPO rally.
The shares have retreated in every session since Soleimani’s assassination. Sunday’s 1.7% decline was the third-largest daily loss in Aramco’s brief history as a public company. It’s down around 3% in 2020.
This underscores why rational people were skeptical about many of the conspiracy theories that circulated in and around the September attacks on Abqaiq and Khurais.
The idea that the Saudis would cripple 50% of their own production capacity in a bid to drive up the price of oil on the way to inflating the value of the forthcoming IPO was always somewhat ridiculous, but it was made even more so by the fact that the strikes actually undermined investor confidence in the offering by showing how vulnerable the company’s infrastructure is to external attacks. Moody’s underscored the risks earlier this week:
As a base case, we continue to assume that the US and Iran will avoid an outright military conflict. However, the risks have markedly increased in the past few days. The credit implications of a military conflict would depend on its duration, scope and the severity of damage to critical infrastructure – factors that would remain highly uncertain for some time should an outright military conflict start. In particular, depending on its scope, the sovereigns and other issuers affected could include Iraq (Caa1 stable), issuers in the Gulf Cooperation Council (GCC), and potentially even the broader region including Lebanon (Caa2 review for downgrade). The main channels of credit transmission would be the immediate effect of the shock to exports and fiscal revenue should hydrocarbon-production capacity be impaired significantly and durably. Furthermore, in Iraq and across the GCC, governments’ capacity to recycle hydrocarbon revenue is key to growth in the non-oil and gas sector. As such, all issuers would be affected by shortfalls in hydrocarbon revenue, with the degree of effect varying according to their credit profiles’ sensitivity to oil and gas output and the size of their foreign exchange and fiscal reserves.
And on, and on. The overarching point is that a war between the US and Iran (or an outright confrontation between Iran and the Saudis that plays out in state-on-state fashion as opposed to by proxy) would be bad news for sovereign credit profiles and likely for Aramco (which is basically just the sovereign), irrespective of higher revenue from crude.
Readers will recall that in the immediate aftermath of the drone and missile strikes on Aramco’s facilities and fields, we were quick to assess that all “false flag” theories aside, Soleimani was likely behind the incident.
Now that he’s gone, the specter of Iran taking revenge via more strikes on the Saudis is a big concern, although his death will likely diminish the Quds’ operational capacity at least until Esmail Ghaani (Soleimani’s successor) establishes a rapport with Iran’s proxies in the west (Ghaani previously ran operations in the east).
CDS spreads on the kingdom have widened in the new year.
Shortly after the IPO, Aramco touched MBS’s “target” valuation in excess of $2 trillion, thanks in no small part to Riyadh’s efforts to engineer a supply/demand imbalance for the shares, while incentivizing retail investors to hold for at least six months.
Goldman, which is still acting as the stabilizing manager for the offering until later this week, hadn’t executed any transactions as of yesterday, according to a statement.