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.
The financial filing was made ahead of Aramco’s debut in the international bond market. The bonds, being pitched to investors this week in a global roadshow, have 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.
The debt raise by Aramco — which produces about 10% of the world’s crude oil — 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 began as a U.S. venture with a concession for oil rights in Saudi Arabia and was fully acquired by the Saudi government in 1980. Aramco officials declined to comment.
Both Fitch Ratings and Moody’s Investors Service assigned Aramco the fifth-highest investment grade, the same as Saudi sovereign debt but lower than that of oil majors Exxon, Shell and Chevron Corp., partly because Aramco doesn’t generate as much cash per barrel because of its heavy tax burden.
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” cyberattack in 2012 that forced the company to move some operations into “manual” mode.
While the prospectus shed light on the richest company on the planet — its net income is more than five times that of Exxon Mobil’s $21 billion in its last full year, and nearly twice that of Apple’s $60 billion — it also showed how reliant Aramco is on high oil and natural gas prices.
In 2016, when the price of Brent crude plunged to an average of $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’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 $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 rating for Aramco — A+, one level below the AA- rating for Shell and well behind Exxon’s top Aaa level — reflects the “strong links” between the company and the kingdom, and the influence the state has on Aramco by 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 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.
The bond plan, credit rating and the publication of the first extracts of Aramco’s accounts are all part of the ambitions of 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.
The bonds are expected to help pay for Aramco’s $69-billion acquisition of majority shares in Saudi petrochemical firm Sabic from the kingdom’s sovereign wealth fund. The deal with Sabic pumps capital into the Public Investment Fund, which is overseen by the crown prince.
Mohammed has transformed the fund to back major development projects throughout the kingdom amid delays to Aramco’s IPO. The crown prince’s early efforts at attracting Western investors for his social and economic transformation plans suffered a setback following the killing of Washington Post columnist Jamal Khashoggi by Saudi agents inside the country’s consulate in Istanbul last year.