Saudi Aramco
The North Pier Terminal, operated by Saudi Aramco, in Ras Tanura, Saudi Arabia. The planned bond deal is Aramco’s inaugural transaction in international markets. Image Credit: Bloomberg

Saudi Aramco was the world’s most profitable company in 2018, easily surpassing US behemoths including Apple Inc. and Exxon Mobil Corp., according to accounts published by ratings agencies before the firm’s debut in the international bond market.

Yet the Saudi kingdom’s influence on the state oil producer via high taxation is also denting its profitability and credit-worthiness, with cash generated per barrel below that of Big Oil companies such as Royal Dutch Shell Plc. That’s getting in the way of Aramco achieving a much higher credit rating.

Aramco generated net income of $111.1 billion in 2018, Moody’s Investor Service said Monday, after Fitch Ratings said the company had earnings before interest, tax and depreciation of $224 billion last year - significantly above figures for Apple and Exxon Mobil. Both agencies gave the Saudi company’s debt their fifth-highest investment grade level.

The group has 257 billion barrels of oil equivalent, representing over 50 years of reserves based on current production levels.

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The credit ratings, a first for Aramco, offer a glimpse into the accounts of the company, which have remained secret since its nationalization in the late 1970s. The information will help investors assess the possible value of a once-in-a-generation deal for financial markets: the firm’s proposed initial public offering, originally targeted for 2018 but last year delayed until 2021.

The company is preparing to raise debt in part to pay for the acquisition of a majority stake in domestic petro-chemical group Sabic, worth about $69 billion. The deal is a Plan B to generate money for Saudi Arabia’s economic agenda after the IPO was postponed. In effect, Crown Prince Mohammed bin Salman is using the firm’s pristine balance sheet to finance his ambitions.

Heavy burden

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 its cash flow. Aramco pays 50 percent of its profit on income tax, plus a sliding royalty scale that starts at 20 percent of the company’s revenue.

$224b

Saudi Aramco’s core earnings last year

Aramco reported cash flow from operations of $121 billion and $35.1 billion in capital spending, and paid $58.2 billion in dividends to the Saudi government in 2018, according to Moody’s. The company had $48.8 billion of cash relative to $27 billion of reported group debt at the end of last year, said the agency, which gave the firm an A1 rating.

Fitch said its A+ rating reflects the “strong links” between the company and the kingdom, and the influence the state has on Aramco through regulating the level of production, taxation and dividends.

“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 per 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.

$86b

Saudi Aramco’s free cash flow at the end of 2018

“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.

Using data provided by Fitch about the company’s total oil and gas production last year and the cash flow per barrel, Bloomberg estimates that Aramco reported total fund flow from operations of about $130 billion last year. Although that’s significantly higher than what Big Oil produces, the difference isn’t a large as the Ebitda. Shell, for example, reported cash flow of $53 billion. Exxon reported cash flow last year of $36 billion.

Fitch’s A+ rating for Aramco is one level below the AA- for both Shell and Total. The Moody’s rating is well behind Exxon’s top Aaa level.

The oil giant has mandated banks to hold a roadshow for dollar-denominated notes from April 1, potentially including tranches from three to 30 years, according to a person familiar with the matter. Fitch said that Aramco planned to pay for the 70 percent stake in Sabic “in installments over 2019-21.”

The company will hold meetings with investors in coming days in cities including London, New York, Boston, Singapore, Hong Kong, Tokyo, Los Angeles and Chicago. Aramco picked banks including JPMorgan Chase & Co. and Morgan Stanley to manage the debt offering.

The bond plan, credit rating and the publication of the first extracts of Aramco’s accounts are all part of the ambitions of Prince Mohammed, who controls most of the levers of power in the kingdom, wants to pursue an IPO as part of his ambitions to ready the country for the post-oil age. Yet his ambition to secure a $2 trillion valuation has faced push back from global investors, prompting a delay in the IPO.

If he achieves the target, the offering will raise a record $100 billion by selling a 5 percent stake, dwarfing the record $25 billion raised by Chinese internet retailer Alibaba Group Holding Ltd. in 2014.

“Saudi Aramco has many characteristics of a Aaa-rated corporate, with minimal debt relative to cash flows, large scale of production, market leadership and access in Saudi Arabia to one of the world’s largest hydrocarbon reserves,” said Rehan Akbar of Moody’s. “The final rating is however constrained by the government of Saudi Arabia’s A1 rating because of the close interlinkages between the sovereign and the company.”