Risk Management by Investors Saudi Aramco

Question: Discuss about the case study Risk Management by Investors for Saudi Aramco. Answer: Introduction: Saudi Aramco, a state-owned oil company owned by the Kingdom of Saudi Arabia, is a fully unified worldwide petroleum and chemicals enterprise. In recent times the company is partnering with leading global companies across the world with an aim to strengthen its downstream business and to achieve competitive advantage from its operations in exploration, production and marketing (Company Website). Key highlights: Headquarter: Dhahran, Saudi Arabia Workforce: More than 65,000 workers and employees worldwide Global Presence: Saudi Arabia, China, Egypt, Japan, India, the Netherlands, the Republic of Korea, Singapore, The United States of America and the United Kingdom. Main Partners, Ventures Affiliates: Saudi Aramco Products Trading Company, Sadara Chemical Co., The Saudi Aramco Total Filtering and Petrochemicals Firm, Fujian Refining Petrochemical Company and S-OIL, South Korea Saudi Aramco, on 08th January 2016, announced and confirmed that the company was studying various plans and options to allow more public participation in its equity shares through sale of an appropriate percentage of its equity stake in its main business through listing in capital markets and through Listing or privatizing some of its downstream subsidiaries. In the present report we will be discussing about the Risk and risk analysis risk management for the various risks as identified for the probable investors of Saudi Aramcos and its downstream subsidiaries equity shares in capital markets. After having identified the various risks we will try to create a risk register containing information about various risks faced by the investors, its severity, probability of occurrences and mitigation plans if any. Then we will perform qualitative risk assessment and try to create risk assessment matrix for various risks to categorize the risks into Low, Medium or High risks and prioritize which risks need to be addressed for mitigation first. After having done all the above we will then discuss the possible risk mitigation strategies available to the investors for various risks mitigation if possible. Risks and Risk Analysis Management - Introduction Risk may be defined as the possibility of occurrence of unexpected outcome or loss (Bouchet, Clark Groslambert 2003). Risk can be bifurcated into four factors viz. probability of occurrence of an event, severity of unwanted impact, external impacts and interdependency with other influences or risks. Risks Analysis Management may be defined as the process of identification of risks, assessment of magnitude of risks, measuring impact of risks and implementation of risk mitigation techniques (Gitman, Joehnk Billingsley 2014). Risk management helps in identification of various risks specific to a project / activity / organization and responding to them in best possible ways to eliminate or mitigate the impact of such risks on project / activity / organization (Merna 2007). Qualitative Risk Identification for Risks to Investors The investors in the capital markets as well as the investors in private investing activities are prone to number of risks for their investments in the companies through the route of share markets or direct investments privately. The following may be categorized as the different risks faced by the investors for their probable investments in the Saudi Aramco or its downstream subsidiaries (Merna 2007): Country Risk: Country risk refers to the risk type which takes shape due to the inherent characteristics of a country based on its geographic and demographic features. The major business operations of the company are geographically located in Saudi Arabia and Middle East. The said geographical area of the globe is prone to unrest and civil war situations thus creating a country risk for the investors. Political Risk: Political risk refers to the risk type which is present due to the political structure and scenarios which were present in the country in the past and the scenarios which are expected to take shape in the future. Saudi Arabia is under the Kingdom Rule creating a Monarchy political situation in the country. It is generally observed that under Monarchy rule the business operations are influenced by the changing political policies of the Kingdom. Industry Risk: Industry risk refers to the risk type which is inherent in the industry in which the main business operations of the company are taking place. Some industries are more prone to risks as compared to other industries. Saudi Aramco deals in oil industry which is the worlds biggest industry but is also prone to various factors including cartels for administering the production of the limited natural resource and the prices of such products. Company Risk: Company risk refers to such risk type which is inherent due to the policies, operations, procedures and management decisions of a company itself. It is generally believed that this risk is the most prevalent in the investments and is also able to avoid this risk by having a diversified investment portfolio by the investors. Saudi Aramco since deals in oil products has inherent risks in its business operations. It deals in production of natural resources which are limited and thus creates a limit on the size a company can attain. Currency Risk: Currency risk refers to the risk type which takes shape when the home currency of the company is different from the operating currency of the company and thus forces a company to have exposure in the number of currency conversion transactions. Saudi Aramco investments have inherent currency risk as the home currency of the company is different from the operating currency of the company. The company needs to incur every expense in terms of US Dollar which is the prevalent currency in oil industry. Investment Risk: Investment risk refers to the risk type which the investors face for the possibility of not being able to recover their initial investment value due to any contingency especially in the situation of possible bankruptcy of the company. Investors of the Saudi Aramco company faces an investment risk for not being able to recover their investments due to possibility of company going bad due to such vulnerable business environment in which the company operates. Legislative Risk: Legislative risk is the risk type which is present due to the changing legislative requirements of the country in the company operates. Changing legislative requirements in the country will always have significant impact on the business operations of the company and may also outcome in rise in the action expenses for the company in-order to conform to the moving legislative necessities. Volatility Risk: Volatility risk is the type of risk which is inherent in the capital markets in which the shares of a company trades. Volatility refers to the changes in the market prices that the share of the company is able to command in the capital markets. Capital markets are often faced with the volatility in the prices of share and securities. Investors of Saudi Aramco will also face such volatility risk in their investments. Liquidity Risk: Liquidity risk refers to that risk type in which the investors are able to convert their investments into cash as and when they feel and is profitable to them. As already discussed about the business operations, political situation in the home country and the geographical presence of the company, the future investors may shy away to invest in the company thereby making the investments of the investors less liquid in the capital markets. Credit Rating Risk: Credit rating risk refers to that risk type which is due to the ratings given by different credit rating agencies to the different companies based on different parameters. There are different credit rating agencies which issues credit ratings for the different companies across the globe. There may be a possibility for the credit rating agency to downgrade the ratings of Saudi Aramco due to changing oil industry and other company specific reasons. This downgrade will result in the loss to the investors due to fall in the value of their investments in capital markets. Risk Register and the Severity of Risks Identified The below mentioned table is a Risk Register for the various risks identified for the investors for their probable investments in the Saudi Aramco or its downstream subsidiaries which describes about the probable risks, risks type, impact of Risks, impact description, probability of occurring, timeline in which the risk is expected to occur, status of responses by investors, any completed actions by investors to mitigate the risk, any planned future actions by the investors to mitigate the risk and risk status as on date (Burtonshaw-Gunn): 1. Basic Risk Information 2. Risk Assement Information 3. Risk Responce Information Risk Number Risk Description / Risk Event Statement Risk Type External /Internal Impact High / Medium / Low Impact Description Probability High / Medium / Low Timeline Near term /Mid term /Far term Status of Response No Plan / Plan Enacted / Effective Plan Enacted Finalized Actions Strategic Future Actions Risk Status Open / Closed / Moved to Issue R 1 Country risk may effect in investments to loose worth in global markets External Low Value of the investments may loose worth as the reserves in the country is no longer viable for global investors Low Far term No Plan N/A N/A Open R 2 Political risk in the country may make business operations on the company financially unfeasible External Medium Profitability of the company may take a impact due to changing political environment as the country is under kingdom rule Low Far term Plan Enacted N/A Make cartels in the industry to influence the political situation in the country Open R 3 Industry risk in the oil industry will result in low prices of the products External High Prices of the product may fall to such lows to make negative cash flows to the company Medium Mid term Effective Plan Enacted OPEC formed to administer prices of the oil industry products N/A Closed R 4 Company policies and announcements may lead to fluctuations in the prices of the shares in capital markets Internal High Profitability and prices of shares of the company may be impacted High Near term No Plan N/A N/A Open R 5 Currency of the country in which the investment is valued may fluctuate in the currency markets External Low Currency fluctuation may result in variations in the value of investments High Near term No Plan N/A N/A Open R 6 Investment risk may result in the investments go bad Internal High Investments in the company may go bad due to company's bankruptcy High Mid term Plan Enacted N/A Offer management expertise in the company to successfully run the business operations Open R 7 Legislative requirements in the country may result in higher operational costs for the company External High Profitability of the company may be impacted due to changing legislative requirements in the country Low Mid term No Plan N/A N/A Open R 8 Volatility inherent in the capital markets may impact share prices External High Price of the shares may take a plunge due to volatility in the capital markets High Near term Plan Enacted N/A Try to minimize the volatility in the company's shares by actively trading in the market Open R 9 Liquidity risk may result in less buyers in future Internal Medium Stake sale will not be possible due to less buyers in the market in future Low Mid term Plan Enacted N/A Arrange an investment banker to discuss the ways in which the stake may be sold in future Open R 10 Credit rating agencies may downgrade the company Internal Low Company's value in the eyes of probable investors may fall due to adverse credit ratings Medium Mid term Effective Plan Enacted Discussions with the credit rating agencies to avoid their apprehensions about the company N/A Closed Qualitative Risk Assessment for Risks to Investors The below mentioned table is a risk Qualitative Risk Assessment Matrix for the various risks identified for the investors for their probable investments in the Saudi Aramco or its downstream subsidiaries (Anthony 2008): Probability Extremely Unlikely Very Unlikely Likely Very Likely Extremely Likely Impact Very Low Low Country Risk Credit Rating Risk Currency Risk Moderate Liquidity Risk Political Risk High Legislative Risk Industry Risk Volatility Risk Very High Investment Risk Company Risk Low Risk Medium Risk High Risk As per the risk matrix above the risks faced by the investors can be categorized into three different categories: Low Risk (Green): The following risks may be categorized as low risk category Country Risk: Very unlikely probability of occurring with low impact on investors Liquidity Risk: Extremely unlikely probability of occurring with moderate impact on investors Medium Risk (Yellow): The following risks may be categorized as medium risk category Credit Rating Risk: Likely probability of happening with low outcome on investors Currency Risk: Very likely probability of occurring with low impact on investors Political Risk: Very unlikely probability of occurring with moderate impact on investors Legislative Risk: Very unlikely probability of occurring with high impact on investors High Risk (Red): The following risks may be categorized as high risk category Industry Risk: Likely probability of occurring with high impact on investors Volatility Risk: Extremely likely probability of occurring with high impact on investors Investment Risk: Very likely probability of occurring with very high impact on investors Company Risk: Extremely likely probability of occurring with very high impact on investors As per the risk matrix above the risks faced by the investors are categorized into three different categories according to which the risks can be prioritized by the investors to be considered for mitigation if possible. As per risk matrix it is advisable to first consider the High risk types (Red) for mitigation followed by Medium risk types (Yellow) and lastly Low risk types need to be considered for mitigation if possible. Qualitative Risk Mitigation Strategies available to Investors As per Risk Register and Risk Assessment Matrix it can be observed that there are a number of risks faced by the investors of Saudi Aramco and such risks have different probabilities of occurrence and different magnitude of impact of the investors. It can also be observed that different risks have different timelines for their occurrences and different status of responses along-with different risk status post mitigation of such risk if possible. Based on risk assessment matrix it can be observed that risks are categorized as Low, Medium and High Risks and based on such categorization the following risk mitigation strategies may be adopted for the risks faced by the investors: References Anthony, L. 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