Saudi Aramco’s riches disguise its risks: Fuel for Thought

Saudi Aramco is by far the most profitable company on the planet and produces more oil than any other single entity, but there are still doubts about the viability of its stalled initial public offering.

The problem for Aramco is that its weaknesses are as obvious as its strengths.

Riyadh’s dream of raising $100 billion by selling a 5% stake in the state-owned oil giant had seemed entirely dead until the company opened its books.

Just over a week ago, Aramco gave a rare glimpse into its financial treasure chest and revealed a pot of gold, which has reawakened interest in its potential listing. At $224 billion, its earnings before interest, tax, depreciation and amortization are three times the size of Apple.

The $111 billion the company made in net profit last year makes it bigger in sheer earnings power than ExxonMobil, Shell and BP combined.

Financial analysts and bankers may still question the lofty valuation of $2 trillion desired by Saudi Arabia’s Crown Prince Mohammed bin Salman, but they can no longer question Aramco ’s gigantic balance sheet.

At the wellhead, Aramco is also insanely efficient when compared to international oil companies.

According to this week’s disclosure, it is producing crude for as little as $3/b, compared with around $40/b in the North Sea. The company also has no shortage of black gold to produce. Its daily capacity can reach 12.5 million barrels in a total global oil market of around 100 million b/d.

Saudi Arabia’s oil reserves, which it has almost exclusive access to, are also vast.

The country holds over 263 billion barrels of proven oil underground. Compare this to Britain, which is down to its last 20 billion barrels as it squeezes every last drop from the North Sea.

There is also no shortage of buyers for Saudi Arabia’s crude, despite the rise of US shale and growing buzz around electric vehicles. World oil demand averaged 100 million b/d last year, and even the glummest forecasts see this trend continuing to at least 2040.

Although Saudi has lost ground in the US, it has increasingly focused on China and India, where demand for hydrocarbons is growing at a faster clip.

Branching out

Aramco is not just about pumping oil. It is buying petrochemicals giant SABIC from the Saudi government for almost $70 billion, giving it a dominant position in the global supply chain for plastics . The company’s executives are embarking on a global roadshow of meetings with bankers to raise debt for the deal, which welds Aramco’s future to Asia’s giant manufacturing economies.

“With petrochemicals demand expected to grow faster than traditional refined products, such as transportation fuels, both IOCs [international oil companies] and NOCs [national oil companies] are likely to continue to invest in petrochemical infrastructure to diversify their portfolios and align their long-term financial prospects with anticipated product demand,” said Jennifer Van Dinter, global head of petrochemicals at S&P Global Platts Analytics.

Risk remains

But despite all these strengths, Aramco is potentially a risk for investors.

The international financial community’s nerves have been shaken by the kingdom’s response to the alleged assassination last year of dissident journalist Jamal Khashoggi. His death followed a year of turmoil and intrigue in Riyadh after the crown prince ordered the arrest of hundreds of his own family in a sweeping corruption probe.

Mohammed bin Salman is the architect of Aramco’s IPO plan. He wishes to use the proceeds from the sale to fund ambitious economic development plans to diversify the kingdom’s economy away from oil. However, his alleged role in the Khashoggi scandal and rapid rise as heir apparent to the Saudi crown has caused anxiety both within the kingdom and outside.

All this uncertainty has fed doubts about the long-term plan for Aramco.

Oil companies have also become less appealing to institutional investors. Norway’s $1 trillion sovereign wealth fund said last month it would divest its holdings in oil and gas explorers, excluding BP and Shell due to their sizeable renewable energy divisions.

Despite the size of its earnings, Aramco is a hard sell with funds that are increasingly weighing environmental, social and governance (ESG) in their investment decisions.

Then there is the issue of Aramco’s independence and its inextricable link to the kingdom’s oil policies.

OPEC association

As the de-facto leader of OPEC , Saudi Arabia is bearing the brunt of US President Donald Trump’s complaints about oil prices climbing too high for the global economy to take. Prices are now pushing $70/b after the cartel and its allies, led by Russia, have continued to hold back supplies despite warnings of damaging global growth.

Accounting for about a third of OPEC’s total production, Aramco could easily find itself at the center of any future political storms surrounding the cartel’s policies. The group could still be effectively outlawed by US politicians if so-called “NOPEC” legislation is passed.

Support for the bill is mixed, but made law, it could make Aramco look too toxic for squeamish Wall Street investors to touch.

Despite these worries, money talks. Aramco’s recent bond prospectus disclosure proves the company has no shortage of cash, but that won’t necessarily be enough to win the hearts and minds of increasingly picky investors.

This article previously appeared as a column in The Telegraph