Phil Flynn | Price Blog
Oil prices are trying to stand tall in the face of global economic turmoil. We had tanking treasury yields, the shutdown of the Hong King airport, fears of an Argentinian debt default, federal government spending at a record $3,727,014,000,000 in the first ten months of fiscal 2019 and a deficit of $866,812,000,000.
The oil market was able to withstand mounting economic headwinds as it prepares for what should be a big drop in U.S. crude supply and the fact that Saudi Arabia is already reducing allocations of oil to their customers as they start to lay the groundwork for its public offering of Saudi Aramco. Yes, the Saudis are getting serious about that after they had an analyst earning call and the word that Saudi Aramco will buy a 20% stake in the oil-to-chemicals business of India’s Reliance Industries Ltd., including the 1.24 million barrels-a-day Jamnagar refining complex on the country’s west coast. From what analysts are saying, the call, while showing some impressive numbers, fails to live up to the 2 trillion-dollar valuation the Saudi’s wanted to have.
Liam Denning at Bloomberg writes, “Taking the 12 months through June as a whole, Aramco’s CapEx of about $35 billion left it with free cash flow of about $88 billion, more than enough to fund $72 billion of dividend payments. Putting those on an Exxon-like yield of 5% implies a value of $1.45 trillion. Yet, assuming ordinary dividends are running at $52 billion a year – as the accounts suggest – about $20 billion of that payout is akin to the more discretionary buybacks oil majors use to distribute exceptional income. Aramco’s payout was 99% of earnings in the first half of 2019 versus just 52% a year earlier. That cyclical element should be priced at a discount to ordinary dividends, especially in light of Aramco’s role in Saudi Arabia’s public finances. Price the dividend at 6%, and the value drops to $1.21 trillion; at 7%, a shade higher than the yield for BP and Shell, it falls to $1.03 trillion.” Of course, because it falls far short of that valuation, it puts more pressure on Saudi Arabia to do whatever they can to keep oil prices high.