Saudi Aramco readies itself for an IPO
On Monday, Aug. 12, Saudi Aramco released half-year results for 1H 2019 and even held its first-ever analyst call. Let us be clear, the world’s largest oil company has only one investor and is not yet publicly traded. This is a second first in less than six months for Saudi Aramco following the initial bond offering in April, which was oversubscribed 10 times.
The exercise has to be seen in the context of Aramco’s highly anticipated IPO (initial public offering), which, according to Chairman and Saudi Energy Minister Khalid Al-Falih, is set to happen in 2020/21. The bond offering tested investors’ appetite, and the release of results will inform potential investors and create internal reporting discipline required for public companies.
We can learn a lot from the numbers. Net income stood at $46.9 billion, down from $53 billion during the same two quarters last year. While profits may be lower than last year, Saudi Aramco remains one of the world’s most profitable companies, with return on capital employed for the period at 36 percent. The absolute number of $46.9 billion also stacks up well compared with other profitable corporations, even in the tech sector. For instance, Apple, the world’s most profitable quoted company, had only $31.5 billion to show for the same period. Gearing was extremely low with 2.4 percent, which makes sense given that the company has very little debt on its books. The company is also extremely liquid with a free cash flow of $38 billion.
The 11.5 percent decrease in profits can be explained by lower oil prices and higher costs. The average oil price for the first half of 2019 is between 7.5 and 8 percent lower than it was during this time period 2018. Keeping the oil market balanced also required a 1.2 million barrels per day (bpd) production cut by OPEC+, an alliance between the OPEC member countries and 10 friendly allied nations. Saudi Arabia was the first mover when it came to cutting production. It also took the lion’s share of the cuts. The Kingdom is the de facto leader of OPEC and needed to be seen to do what it takes to enact the cuts and inspire the necessary discipline — especially since Al-Falih and his Russian counterpart Alexander Novak co-chair the influential Joint Ministerial Monitoring Committee, which oversees compliance with the decisions of OPEC+.
If the current set of numbers proved one thing, it is that Saudi Aramco is financially very sound and extraordinarily well run.
Cornelia Meyer
The numbers also showed that Aramco adheres to a strict investment discipline. Capex was $14.5 billion, which stacks up well compared with its peer group. Aramco also announced the purchase of a 20 percent ($75 billion) stake in Reliance’s oil-to-chemicals business. This is the largest-ever foreign investment in the Indian behemoth. Saudi Aramco’s investment makes sense when seen in the context of its downstream integration, especially in Asia. The company’s acquisition of 70 percent of SABIC was an important building block of that strategy.
The dividend of 46.4 percent, which constitutes an increase compared with the same period last year, may well be the most important number in light of the impending IPO. In a world deprived of yield, Aramco demonstrates returns to shareholders. This is important in a sector where investor sentiment is declining amid carbon emissions targets and substitution of hydrocarbons by other sources of energy such as renewable, as well as the increasing popularity of technologies which substitute for oil, such as electric vehicles. All of this leaves investors wondering about the demand for oil in the coming decades.
There are other questions potential equity investors might ask themselves concerning geopolitical uncertainties in the region, and their rights compared with those of the main shareholder, the company’s tax burden and social as well as other spending, which is unrelated to Aramco’s core business. In that context, showing that the company has the ability and especially the willingness to return profits to shareholders is crucial to entice investors to buy into Aramco’s business model.
If the current set of numbers proved one thing, it is that the company is financially very sound and extraordinarily well run. It has the financial ability, competence and grit to withstand whatever market uncertainties are thrown at it. We should expect strong investor interest in an IPO, whenever it will take place.
• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
