Saudi Aramco, world’s biggest company, earnings preview

While competitors posted outstanding results with high crude prices, it's still a question whether the world's largest company can beat the particularly optimistic projections.

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Sustainability also applies to stock prices

After Aramco overtook Apple as the world’s most valuable company thanks to high oil prices, the vast majority of analysts are expecting the company's shares to stay elevated. In the turbulent crude market, Aramco has a distinct advantage over some of its major competitors such as BP, Shell, and even Exxon: It has no business operations in Russia that it needs to sell.

But the recent boost to the company has come from the geopolitical situation that has pushed oil prices extraordinarily high. Oil is notoriously unpredictable, and betting on geopolitics is always risky business. The company has sought to ramp up production to take advantage of higher prices and the move away from Russian crude. But it is still taking some cautious steps.

The outlook

After reporting an 82% increase in profits last quarter, Aramco affirmed its capital expenditure program at $40-50B this year. It's an increase over the $35B spent while the pandemic was still on. Despite the massive increase in profits, the company only gave a token increase in dividends and preferred to pay down debt. These are signs of a company settling in for value creation, not quick improvements in stock price.

Additionally, the company pays 80% royalty on oil above $100/bbl, meaning that the potential profit increase if oil remains high is limited. But if a resolution were reached on Ukraine or Russian oil became politically viable, the price of crude could come down. Suggesting a bigger downside risk with relatively small upside potential.

On the other hand, it's been reported that Aramco is looking to IPO its trading arm. Given the high price of oil and the search for value, this could prove a substantial source of funds for the company. While that might tempt some stockholders, it's still not sure whether Aramco will distribute the windfall profits, or simply put them aside for future development.

Bearish engulfing and runaway gap

The share price of Saudi Aramco started to fall following a double divergence between prices and the RSI. The reversal was incurred on a single shooting star formation which was then followed by a bearish engulfing day. As if that was not enough, a runway gap suggests the move is driven by intense selling.

The last time a similar pattern formed back in March, the stock price plunged near $35 per share. And that happened without an RSI divergence. This increases the chances of revisiting the major support, and perhaps even breaking below it should the bottom trendline of the regression channel weakens. If the gap gets filled quickly, we could see a reversal back to $43.35.

Source: TradingView

Key takeaways

Saud Aramco’s stock price has gone up thanks to the high oil prices and from having no business operations in Russia. But the company seems to be more interested in value than quick gains. With the price of oil above or below $100/bbl the stock price is under threat of downside risk unless it decides to distribute profits from IPO’ing its trading arm.