Opinion

Saudi Aramco readies itself for an IPO

Saudi Aramco readies itself for an IPO

Author

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

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view

Saudi Aramco sets share sale stage with $47 billion profit

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Shaybah, the base for Saudi Aramco's Natural Gas Liquids plant and oil production in the surrounding Shaybah field in Saudi Arabia's remote Empty Quarter. (AFP file photo)
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In this file photo taken on January 16, 2018, the Saudi Aramco exhibit is shown at the 2018 North American International Auto Show in Detroit, Michigan. (AFP / GETTY IMAGES NORTH AMERICA)
Updated 13 August 2019

Saudi Aramco sets share sale stage with $47 billion profit

  • Saudi oil giant holds first-ever earnings call with investment analysts

DUBAI: Saudi Aramco proved itself the most profitable company in history on Monday with financial figures that beat all its competitors by a long way.

The Kingdom’s oil giant reported net income of $46.9 billion for the first half of 2019, way ahead of the $31.5 billion reported by the next biggest earner, Apple. Aramco’s profits are nearly 50 percent higher than those of the five largest Western oil companies combined.

It was the first time Aramco — a private company owned by the Kingdom — had disclosed its financial strength in a formal results announcement, and followed the unprecedented level of financial information disclosed in April, when it broke world records in the bond markets with a much-in-demand $12 billion issue.

The company also underlined that it was ready to go to international stock markets in an initial public offering (IPO) of shares whenever the Kingdom thought conditions were right. Some experts think the IPO could happen next year — earlier than many analysts had predicted.




Saudi Aramco's president and CEO, Amin al-Nasser. (AFP file photo)

Amin Nasser, the president and chief executive of Aramco, said the company’s profits — lower than in the same period last year — were earned against a background of tough conditions in the global energy market.

“Despite lower oil prices during the first half of 2019, we continued to deliver solid earnings and strong free cash flow underpinned by our consistent operational performance, cost management and fiscal discipline,” he said in a formal statement to the London Stock Exchange, where Aramco’s bonds are listed.“Our financials are strong and we continue to invest for future growth.”

 

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The profit announcement came at the start of a busy day for Aramco. It also announced a planned investment in the petrochemicals and refining business of the Indian comglomerate Reliance Industries. There was speculation about Aramco buying a 20 per cent stake in the business for about $15 billion, but Khalid Al-Dabbagh, Aramco’s chief financial officer, declined to confirm those figures and said the talks with Reliance were at “an early stage.”

Al-Dabbagh was speaking on a conference call with investment analysts — another first for Aramco — in which he also revealed that the upgrade to the Kingdom’s east-west pipeline, aiming to increase capacity on the route from 5 million to 7 million barrels per day amid security concerns in the Arabian Gulf, would be finished next month.

Dividend payments to the Kingdom amounted to $46.4 billion in the first half of 2019, including a “special dividend” of $20 billion “refecting the exceptionally strong financial performance the company delivered in 2018.”


ALSO READ:  Saudi Aramco ‘ready’ for IPO, says oil giant’s finance boss


 


France ready to take Trump’s tariff threat to WTO

Updated 08 December 2019

France ready to take Trump’s tariff threat to WTO

  • Macron government will discuss a global digital tax with Washington at the OECD, says finance minister

PARIS: France is ready to go to the World Trade Organization to challenge US President Donald Trump’s threat to put tariffs on French goods in a row over a French tax on internet companies, its finance minister said on Sunday.

“We are ready to take this to an international court, notably the WTO, because the national tax on digital companies touches US companies in the same way as EU or French companies or Chinese. It is not discriminatory,” Finance Minister Bruno Le Maire told France 3 television. Paris has long complained about US digital companies not paying enough tax on revenues earned in France.

In July, the French government decided to apply a 3 percent levy on revenue from digital services earned in France by firms with more than €25 million in French revenue and €750 million ($845 million) worldwide. It is due to kick in retroactively from the start of 2019.

Washington is threatening to retaliate with heavy duties on imports of French cheeses and luxury handbags, but France and the EU say they are ready to retaliate in turn if Trump carries out the threat. Le Maire said France was willing to discuss a global digital tax with the US at the Organization for Economic Cooperation and Development (OECD), but that such a tax could not be optional for internet companies.

“If there is agreement at the OECD, all the better, then we will finally have a global digital tax. If there is no agreement at OECD level, we will restart talks at EU level,” Le Maire said.

He added that new EU Commissioner for Economy Paolo Gentiloni had already proposed to restart such talks.

France pushed ahead with its digital tax after EU member states, under the previous executive European Commission, failed to agree on a levy valid across the bloc after opposition from Ireland, Denmark, Sweden and Finland.

The new European Commission assumed office on Dec. 1.