Aramco's US$111 billion net income places it ahead of some of the world's most profitable firms. Photo / AP
By Thomas Heath
Saudi Arabia's first-ever disclosure of the finances behind its giant national oil company, Saudi Aramco, provided a rare glimpse inside the world's largest oil company.
The company's raw numbers are breathtaking. Aramco has 201 billion barrels of oil (that doesn't include natural gas) under the sand. (The United States has proven reserves of less than 40 billion.) That Saudi black gold is worth about US$10 trillion ($14.8t) at a conservative price of US$50 a barrel. The Saudis pump 11.6 million barrels of oil a day out of the Arabian desert. That is three times as much as US oil giant ExxonMobil produces worldwide.
One epic Saudi field, the Ghawar, pumps 3.8 million barrels a day after 70 years, about equal to the entire daily oil production of Canada.
Aramco is a profit gusher, too. Its US$111 billion in net income in 2018 was more than five times ExxonMobil's and nearly double the profit reported by Apple, one of the stars of the US economy.
"The breadth of Aramco is staggering," said Stewart Glickman, an energy-equity analyst at CFRA Research.
The world got a peek into Aramco's financials because the company is selling US$10b in bonds to help finance the US$69b purchase of a majority stake in Saudi Basic Industries Corp., a petrochemical company, from a state-owned investment fund.
The deal is intended to promote efforts by Mohammed bin Salman, the kingdom's 33-year-old crown prince and de facto ruler, to diversify the oil-based economy into higher-margin industries as concern grows over the effect of hydrocarbon fuels on the global climate.
"The Saudis are keenly aware of the pushback against hydrocarbons, and many see peak oil demand occurring by 2040," said John Kilduff of the Again Capital investment firm.
Aramco relies on crude oil production, known as upstream business, for a large percentage of its profits. The company extracts oil from the ground and loads it into tankers. The tankers transport its crude around the world to be refined, most often by another company.
The industry's "supermajors" - Exxon, Chevron, BP, Shell and Total - on the other hand, have done more to diversify into refining and other downstream "margin" businesses, which turn crude into finished products, such as gasoline and petrochemicals.
Refining is a natural hedge against falling oil prices because the margin between the declining price of crude and the price of finished products typically grows.
Exxon attributed 39 per cent of its 2018 after-tax profits to refining and the production of chemicals. Those activities are believed to account for a much smaller percentage of Aramco's profit. The investment in Sabic is part of an effort to amend that situation while also freeing up billions of dollars for the crown prince to invest.
Other than provoking sheer voyeurism, Aramco's 469-page bond prospectus offers a chance to evaluate what kind of investment Aramco might be if it ever sells stock on the public markets.
"Before this, nobody had any inkling how much money they were making," Glickman said. "This bond offering could be a way to test the waters on the international appetite for a Saudi capital raise."
A bond sale only requires that the issuer earn enough money to cover the interest on the bond and pay off the bond when it matures. Aramco's bonds are likely to be scooped up by the big banks, investment houses and mutual funds. You and I won't be buying those bonds, but the offering will probably help fund the pension of some retired firefighter in California.
A public offering of Aramco stock would ask investors to make a bet on the company's growth, the stability of the Saudi monarchy, the company's tax burden, and the global demand for oil decades into the future.
Trust in the Saudi government, and the crown prince, has suffered since the October 2 murder of Washington Post columnist Jamal Khashoggi by Saudi agents inside the Saudi Consulate in Istanbul.
Aramco has a lot going for it. It has all that oil, for starters. Unlike many of its competitors - some of which drill in harder-to-work places such as ocean floors, the arctic and politically unstable countries - Aramco has oil that is very cheap to extract.
"It's like sticking the straw in the ground and just sucking the oil out, probably as close as you can get to Jed Clampett of "The Beverly Hillbillies" finding it in his backyard," Kilduff said. "Easy pumping, not a lot of technology."
Aramco has such plentiful, easily accessible oil that it doesn't have to invest as much in production, on a percentage basis, as the big integrated oil companies like Exxon and Chevron. That allows Aramco to keep more of its cash, instead of spending it on developing oil fields.
"They are efficient," Pavel Molchanov, an energy analyst at the Raymond James financial services firm, said of Aramco. "That's what Saudi Arabia is all about."
One big reveal in the bond prospectus was the status of the Ghawar oil field. Its 3.8 million barrels a day of oil production is 25 per cent less than previous estimates based on Saudi disclosures in 2004.
"That data point was not as bullish," Molchanov said. "It does not mean they exaggerated 15 years ago. I suspect the field really did become less productive. There's not many other fields on the planet that have produced for 70 years."
Nevertheless, Ghawar's depletion casts doubt on the notion that the kingdom's oil reserves are nearly inexhaustible.
The bond prospectus also shows that Aramco has one type of bill that's much bigger than ExxonMobil's: a 50 per cent tax payment to the government. Aramco turns over more than US$100b of its profits to the government.
"You have to understand that this is not like a privately run company with an appointed chief executive and a board of directors," Glickman said. "Everything with this company is a result of the dictates of the kingdom of Saudi Arabia."
Kilduff said he has strong reservations about buying Aramco stock if it ever hits the market because of the political risk.
"While I would buy the bonds, I am not in favour of the stock because of the potential for interference by the government in Aramco's operations," Kilduff said.
"For example, it was just revealed that the Saudi government recently changed the taxing scheme for Aramco. Any future stock price would be highly vulnerable to indiscriminate actions like that."
Rating agencies have given the bonds high, but not their highest, marks. Fitch rated Aramco bonds A-plus (best rating: AAA), and Moody's rated them A1 (best rating: Aaa). The agencies said the ratings would have been better - similar to those given the supermajors - if not for the close government ties and high taxes.
The fat tax payment left Aramco with cash flow from operations last year of US$24.38 per barrel of oil equivalent (a measure that includes natural gas as well as crude oil). That is where Exxon makes up some ground. It's operating cash flow per barrel of oil was US$25.74.
Several investors I spoke with said the bond sale is a relatively safe bet. There is plenty of Aramco cash to cover the payments. A stock sale of Aramco would be a far more complicated proposition.
"The prospectus gives us a point in time," Molchanov said. "We know what today's production capacity is. We don't know the trajectory of that number. What's the outlook? How is that number expected to track into the foreseeable future? If and when Aramco goes public, these are issues that have to be answered in considerably more detail."
Still, Molchanov said, "if somebody said 10 years ago that Saudi Arabia would publicly disclose its audited financials, I don't think anybody would believe it."
- Thomas Heath is a local business reporter and columnist, writing about entrepreneurs and various companies big and small in the Washington metropolitan area.
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