Saudi Aramco shares have tumbled 10% from their peak levels less than a month after IPO, however, it still looks too expensive compared to peers.

Last week the U.S. ordered a drone strike which killed Iran’s most prominent general Qassem Soleimani and caused crude oil futures (TICKER:UK:BRENT CRUDE) to briefly top $70 over fears of supply issues. Today the futures retreated to $68 as the investors continue to evaluate the risks.

READ MORE: Oil prices pulls back from multimonth high as traders assess Mideast conflict

The oil price gain boosted Aramco’s western peers, with Royal Dutch Shell (TICKER:RDSA.LN) up 3.4% over the first six days of the year, BP (TICKER:BP.LN) gaining 5.5%, and Exxon Mobil (TICKER:XOM) growing 1.6%.

Saudi Aramco, however, did not benefit because of investors’ concerns about its proximity to the Middle East. The oil giant, known officially as Saudi Arabian Oil Co (TICKER:2222.SA)., saw its shares dip more than 2% in the first week of 2020. Everyone still remembers the attacks on Saudi Aramco oil facilities in September, which caused Brent futures to shoot up $8 in one day.

READ MORE: Why oil could hit $80 even without a ‘full-blown’ U.S.-Iran war

The market is concerned with further possible attacks on Aramco facilities, Russ Mould, AJ Bell investment director, told MarketWatch.

“Also there’s perceived to be a higher risk associated with assets based in the Middle East as they’re so much nearer to any potential further military actions,” he said. “One of the risks with Aramco was always a higher risk premium because of where they’re based and the uncertainty in the Middle East. I guess it’s just a reflection of that today more than anything else.”

The Saudi oil giant might face a big challenge if it decided to look into a secondary offering at some stage, Mould added.

“I think at $2 trillion it doesn’t look particularly cheap on a valuation basis, even allowing for the $75 billion yield, huge reserves, lower cost of production,” he said. “Anything below $1.5 trillion in valuation looks a little bit more interesting.”

Saudi Aramco shares are more exposed to a geopolitical risk or any weakness in the oil price than their peers, Mould said.

He added: “In the short term in the international context the shares look expensive relative to their peers, so I personally wouldn’t be falling over myself to buy the shares.”

Oil companies with assets outside of the Middle East look more attractive at the moment, Bjarne Schieldrop, chief commodities analyst at SEB research, told MarketWatch.

The situation in the region is highly unpredictable, but if a disruption does happen, it won’t be immediate, he said.

“Iran threatened to retaliate, but there is no certainty over how and when that happens. It will probably target the U.S. soldiers and not necessarily oil facilities in Saudi Arabia.”

However, in the medium term, if Iraq kicks out U.S. troops, Iraq will then most likely “fall into the arms of Iran”, Schieldrop predicted.

“Trump threatened Iraq with sanctions that are even harsher than Iran’s. The most likely scenario is the U.S. soldiers exit Iraq, the U.S. imposes sanctions, and limits oil export to the world, which would mean higher oil prices.”

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2020-01-08