From Bloomberg

The first official glimpse of Saudi Aramco’s financial performance confirms the state-run oil giant can generate profit like no other company on Earth: net income last year was $111.1 billion, easily outstripping U.S. 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 organization that produces about 10 percent 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 nationalization 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 company is preparing to raise debt in part to pay for the acquisition of a majority stake in domestic petrochemical group Sabic, worth about $69 billion. The deal is a Plan B to generate money for Saudi Arabia’s economic agenda after an IPO of Aramco was postponed. In effect, Crown Prince Mohammed bin Salman is using the firm’s pristine balance sheet to finance his ambitions.

Aramco will pay 50 percent of the Sabic acquisition cost when the deal closes and the rest over the subsequent two years, according to a person who saw a presentation made to potential investors on Monday. Aramco declined to comment.

The 470-page bond prospectus, filed with the London Stock Exchange, detailed a litany of risks for prospective investors, including missiles falling on Aramco’s installations, the impact of proposed U.S. 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 giant was the victim of a “successful” cyber attack in 2012 that forced the company to move some operations into “manual” mode.

While the prospectus revealed the richest company on the planet, it 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 $13 billion and free cash flow a tiny $2 billion.


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’scash 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 and rises to as much as 50 percent with the price of oil.

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. In a presentation to potential bondholders, the company said its “ordinary dividend” last year was $52 billion. There wasn’t an immediate explanation about the gap between the two figures.

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 abarrel 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.

Aramco told potential bondholders it generated operating cash flow of $121 billion in 2018. Although that’s significantly higher than oil majors produce, the difference isn’t a large as the Ebitda or the net income. Shell, for example, reported cash flow of $53 billion, despite a significantly lower oil and gas production than Aramco. 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 and wants to pursue an IPO as part of his plans to ready the country for the post-oil age. Yet his ambition to secure a $2 trillion valuation has faced pushback from global investors, prompting a delay in the IPO.

For all the shock and awe 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.

From Reuters

Saudi Aramco, the world’s biggest oil producer, made core earnings of $224 billion last year, almost three times as much as Apple, figures from the state-owned company showed on Monday ahead of its debut international bond issue.

Previously reluctant to disclose its financials, Aramco had to reveal them in order to obtain a public rating and start issuing international bonds.

Despite the huge profit, the state-owned oil giant was rated by credit agencies at par with Saudi Arabia, meaning the kingdom’s sluggish economy will weigh on Aramco’s cost of borrowing as it prepares its bond market debut.

Aramco’s core earnings surpass those of Apple, ranked by Forbes as the world’s top company in terms of profits last year, which had normalized core earnings, or EBITDA, of $81.8 billion.

Saudi Energy Minister Khalid al-Falih said earlier this year Aramco’s planned bond sale would raise around $10 billion, but banking sources said the transaction could be larger.

Rating agencies Fitch and Moody’s rated Aramco A+ and A1 respectively, but both said that without sovereign rating constraints it would be in the same league as oil companies like Exxon Mobil, Chevron and Shell.

“Saudi Aramco’s rating is constrained by that of Saudi Arabia (A+/Stable),” Fitch said. “This reflects the influence the state exerts on the company through taxation and dividends, as well as regulating the level of production in line with its OPEC commitments.”

However, Aramco’s bond prospectus said the kingdom would not guarantee Aramco’s notes and was under no obligation to extend financial support to the company.

Fitch put Aramco’s standalone credit profile at “AA+”.

Credit ratings allow investors to compare and assess the credit quality of bond issuers and their debt securities, and are important in determining how much borrowers have to pay.


The planned bond deal is Aramco’s inaugural transaction in international markets. It still plans to launch an initial public stock offering or IPO in 2021, expected to generate $100 billion, having postponed its flotation from 2018.

“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, senior credit officer at Moody’s.

The group has 257 billion barrels of oil equivalent, representing more than 50 years of reserves based on current production levels, according to a company presentation.

Aramco will start meeting international bond investors this week for the much anticipated debt transaction.

The planned bond sale follows the announced acquisition of a 70 percent stake in Saudi Basic Industries Corp (SABIC) from Saudi Arabia’s Public Investment Fund (PIF) in a deal worth $69.1 billion.

Aramco said the bond sale, which may be split into tranches with maturities ranging from three to 30 years, is not linked to the SABIC acquisition.

Aramco intends to pay for the acquisition in tranches, with 50 percent at the closing of the transaction and the remainder over a two-year period, from internal cash generation and, potentially, other resources, the company said.

The SABIC deal will be completed in 2020, Aramco said separately in the prospectus, adding it will fund half of the acquisition with promissory notes issued to the PIF.


“Saudi Aramco has an extremely strong liquidity position,” Moody’s said, with $48.8 billion in cash against $27 billion in reported debt.

“The company’s balance sheet leverage has been conservatively managed,” said the agency, adding it has $46.8 billion of bank facilities, of which about $25.5 billion was still available.

Aramco representatives will meet with investors in Asia, Europe and the United States through Friday, April 5, according to a document issued by one of the banks leading the deal.

The roadshow has no planned stop in the Middle East, showing the deal is mostly aimed at international buyers.

“The blue-chip company is extremely profitable, free cash flow positive, has low leverage and strong reserves for the future, making it a compelling investment case for global investors,” said Parth Kikani, fixed income director at Emirates NBD Asset Management.

Aramco had a net income of $111 billion last year. Revenue from upstream operations stood at around $217 billion, while downstream revenue was $139 billion. It had $86 billion in free cash flow at the end of 2018.

The firm is presenting itself to global investors as an “anchor of global energy” and a global energy provider of systemic importance, producing one of every eight barrels of global crude, according to its presentation.

Aramco has hired Lazard as financial adviser for the bond deal, and JP Morgan and Morgan Stanley as global coordinators. They are joined by Citigroup, Goldman Sachs, HSBC and NCB Capital as bookrunners.

From The Wall Street Journal

Saudi Arabia on Monday for the first time revealed details to investors that show its national oil company is the world’s most profitable business, demonstrating that the cloistered kingdom is willing to undergo unprecedented scrutiny to tap international cash.

With $111 billion in net income in 2018, Saudi Aramco, as the firm is known, had bigger returns last year than Apple Inc. and Exxon Mobil Corp. combined. Before taxes and other expenses, the firm said it made $212 billion, a figure similar to the combined military budgets of the 28 member states of the European Union.

The financial information on Monday was disclosed in a prospectus for a planned bond sale of at least $10 billion to help fund the acquisition of a $69.1 billion stake in Saudi Arabia’s national petrochemicals firm. The 470-page document provided the first look under the hood of Aramco’s finances since the once-American-run firm was nationalized over three decades ago and its profits became state secrets.

By disclosing Aramco’s profits and other detailed financial information, some Saudi officials hope they will quell any doubts about their determination to list Aramco publicly by 2021, in what would likely be the biggest ever IPO. Saudi Crown Prince Mohammed bin Salman, the kingdom’s day-to-day ruler, wants to use the IPO to raise tens of billions of dollars to build new futuristic new cities, diversify the kingdom’s oil-dependent economy and fund a host of non-oil industries like technology, entertainment and mining.

The 33-year-old prince first broached the IPO in early 2016, but concerns over disclosing Aramco’s finances helped delay it for years, to the point that many bankers and Saudi officials working on the plan believed it would never happen.

“These financials have not been open to the public. It is an important issue and this is probably a steppingstone to an IPO,” said Theodore Holland, a senior portfolio manager at Zurich-based Fisch Asset Management AG who aims to participate in the debt raising. He said there would be strong demand among investors for Aramco debt.

The financial figures—audited by PricewaterhouseCoopers Public Accountants—painted a picture of a company with unmatched financial heft.

The oil firm’s 2018 net income shot up from 284 billion Saudi riyals, or the equivalent of $75.9 billion, in 2017. By comparison, Apple’s equivalent most-recent full-year profit was roughly $60 billion; Inc. was $10 billion and Exxon Mobil Corp. was $21 billion.

Aramco’s massive earnings numbers come despite taxes of roughly 50% to the government, which is highly reliant on contributions from the oil firm. Aramco also pays a royalty to the Saudi government of 20% of revenues up to $70 a barrel of oil, and the rate increases on a sliding scale at prices above that level. Fitch Ratings estimates that from 2015 to 2017, Aramco accounted for around 70% of Saudi Arabia’s revenues.

But the three years of financial information contained in the prospectus illustrate how tightly Aramco’s profits are tied to oil prices.

Aramco reported a significantly lower net profit in 2016 of $13.2 billion, the prospectus said, when oil prices fell to an average monthly low of $31.90 a barrel in January that year. Its 2018 profits grew almost ninefold in a year when oil prices rose to over $80 a barrel.

Opening up Aramco’s books doesn’t necessarily mean the company will go ahead with an IPO.

Prince Mohammed previously announced he would list 5% of Aramco in 2018 at a valuation of roughly $2 trillion, though that process was delayed due to concerns that the company’s worth wasn’t close to the royal’s estimate.

The figures released Monday indicate a lower potential valuation for Aramco, up to about $1.5 trillion, assuming oil prices around $70 a barrel, according to Bernstein Research and Saudi officials familiar with internal calculations. Brent crude was above $68 a barrel on Monday.

Nevertheless, the disclosures to obtain a large foreign bond marked a coming-out party for Aramco.

Aramco has chosen banks including JPMorgan Chase & Co. and Morgan Stanley to manage its first debt offering and hold a roadshow beginning Monday in at least eight cities in the U.S., Europe and Asia. Investment bank Lazard is also an independent adviser on the bond sale.

The proceeds would be used for as a down payment on its $69.1 billion purchase of 70% of Saudi Basic Industries Corp., or Sabic with the remainder of the acquisition paid in installments over time, The Wall Street Journal has reported.

Aramco said Monday in the bond prospectus that it would pay 50% of the acquisition price at the closing of the deal sometime next year and the rest in installments up to 2021.

Aramco is buying the Sabic stake from Saudi Arabia’s sovereign-wealth fund, Public Investment Fund, which is expected to use the proceeds to drive Prince Mohammed’s agenda. The fund has already invested or committed nearly $100 billion to partnerships such as SoftBank Group Corp.’s Vision Fund and stakes in technology firms such as Uber Technologies Inc.

Ahead of the Aramco bond sale, agencies published ratings on the oil firm for the first time. Fitch rated Aramco at A+, the fifth-highest investment grade level and the same as Saudi Arabia’s sovereign bonds. The firm also said it assessed the company’s stand-alone credit profile, ignoring sovereign-related risks, at AA+, or one notch above the level at which the Saudi government itself can raise debt.

Moody’s likewise rated Aramco A1, a similar level to that given by Fitch, and noted that the oil firm’s ties to the government meant it couldn’t be assessed higher.

By comparison, Exxon is rated AAA by Moody’s, its highest level. Moody’s said Saudi Aramco’s bond rating was lower than Exxon’s and others because it “is constrained by the rating of the government of Saudi Arabia given the broad credit linkages between the two.”

Saudi Aramco is the world’s largest oil producer by volume, Fitch said. The oil firm’s 2018 total hydrocarbon production averaged 13.6 million barrels of oil equivalent a day, including natural gas output, ahead of global and regional producers such as Abu Dhabi National Oil Company, Royal Dutch Shell PLC, Total SA and BP PLC, the ratings agency said.

Saudi Aramco estimates its proved liquids reserves at 227 billion barrels and its total hydrocarbon reserves at 257 billion barrels of oil equivalent. Aramco’s net cash position at the end of last year was $48.8 billion and total borrowings were $27 billion, according to the bond prospectus. It made 69% of revenues last year from upstream oil and gas and the remainder from so-called downstream operations.


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