The first official glimpse of Saudi Aramco’s financial performance has unveiled net income of $111.1bn last year, outstripping US behemoths including Apple Inc and Exxon Mobil Corp. But accounts published before the firm’s debut in the international bond market also show Aramco – an organisation that produces about 10% of the world’s crude – doesn’t generate as much cash per barrel as other leading oil companies like Royal Dutch Shell Plc because of a heavy tax burden. The bond sale, being pitched to investors this week in a global roadshow, has forced Aramco to reveal secrets held close since the company’s nationalisation in the late 1970s, casting a light on the relationship between the kingdom and its most important asset. Both Fitch Ratings and Moody’s Investors Service assigned Aramco the fifth-highest investment grade, the same as Saudi sovereign debt, but lower than oil majors Exxon, Shell and Chevron Corp.
The 470-page bond prospectus, filed with the London Stock Exchange, detailed a host of risks for prospective investors, including missiles falling on Aramco’s installations, the impact of proposed US antitrust laws on Opec, the fight against climate change, and even the risk that Saudi Arabia will break the peg between its currency, the riyal, and the U.S dollar. It also revealed the Saudi oil firm was the victim of a “successful” cyber attack in 2012 that forced the company to move some operations into “manual” mode. The prospectus also showed how reliant Aramco is on high oil and natural gas prices. In 2016, when the price of Brent crude plunged to average $45 a barrel and Opec cut production, the company struggled to break even. Net income for the full year was just $13bn and free cash flow a tiny $2bn.
The kingdom’s dependence on the company to finance social and military spending, as well as the lavish lifestyles of hundreds of princes, places a heavy burden on Aramco’s cash flow. Aramco pays 50% of its profit on income tax, plus a sliding royalty scale that starts at 20% of the company’s revenue and rises to as much as 50% with the price of oil. Aramco reported cash flow from operations of $121bn and $35.1bn in capital spending, and paid $58.2bn in dividends to the Saudi government in 2018, according to Moody’s. In a presentation to potential bondholders, the company said its “ordinary dividend” last year was $52bn. There wasn’t an immediate explanation about the gap between the two figures. “Over time, a low oil price environment could cause a sustained fiscal deficit for Saudi Arabia that could result in changes down the line for Aramco’s fiscal regime,” said Neil Beveridge, an energy analyst with Sanford C Bernstein & Co in Hong Kong. “You can’t disassociate the sovereign government from Aramco given the very close relationship and the contribution Aramco makes to the overall funding for Saudi Arabia.”
Aramco reported funds flow from operations – a measure closely watched by investors and similar to cash flow from operations – of $26 a barrel equivalent of oil last year, according to Fitch. That’s below what Big Oil companies such as Shell and Total SA enjoy, at $38 and $31 per barrel, respectively. “Funds from operations, which is operation cash flows before working capital changes, is the best measure to compare oil companies’ profitability, since Ebitda does not take into account taxation,” Dmitry Marinchenko, senior director at Fitch in London, said in an interview.The bond plan, credit rating and the publication of the first extracts of Aramco’s accounts are all part of the ambitions of Crown Prince Mohammed bin Salman to pursue an IPO as part of his plans to ready the country for the post-oil age. Yet his ambition to secure a $2tn valuation has faced pushback from global investors, prompting a delay in the IPO. For all the shock in Aramco’s big reveal, the published numbers appear to leave that valuation a long way off, implying a dividend yield about half of what Shell pays.
Sources and photo-credits: Bloomberg, Gulf Times