The Fuse

Aramco Lifts the Lid on its Financials in New Bond Prospectus

by Alex Adams | @alexjhadams | April 08, 2019

Ahead of its international bond debut and Sabic equity purchase, Saudi Aramco opened its financials up to public scrutiny for the first time since its nationalization in the 1970s. In doing so, it revealed the scale of its operations, the production advantages it enjoys, and its profitability as the world’s largest oil company.

The disclosures in Aramco’s bond prospectus detail a company which has production costs that are less than half of its nearest rival and achieve levels of production greater than ExxonMobil, Chevron, Shell BP and Total combined. Per its bond prospectus, the cost of extracting oil from underneath the Saudi sand is just $2.80 per barrel, less than half the costs of its nearest rival, Equinor, and less than a fifth of ExxonMobil. Aramco’s enormous liquids production last year of 11.6 million barrels per day (Mbd) drove 2018 profits of $111 billion, almost double the profits posted by Apple.

Despite these eye-popping figures, Aramco is exposed to a number of risks. The company generates less cash per barrel than some rival companies like Shell, because of a heavy tax burden. The financials also show just how reliant Aramco is on higher oil and gas prices: In 2016, when OPEC maintained high production levels that crashed the price of oil, Aramco struggled to break even. Net income for the year was $13 billion—compared to $111 billion in 2018—and free cash flow was a mere $2 billion.

Concerns over U.S. antitrust litigation is also listed amid the risks. While not mentioning the No Oil Producing and Exporting Cartels Act (NOPEC) by name, the company acknowledges that while it has used a variety of legal defenses to dismiss suits in the past, it concedes that “there is no assurance the Company will prevail in its assertion of these defences in the future.” Introduced with bipartisan support in both the House and Senate, NOPEC would amend the Sherman Act to stop OPEC and its members from using sovereign immunity and the Act of State doctrine to evade antitrust lawsuits from the U.S. government.

Aramco also listed political instability in the region, particularly in Yemen, as another risk for investors. The prospectus states that “since 2017, several ballistic missiles were fired into the Kingdom from Yemen, including at the Jazan region where the Company has refining and chemicals facilities,” adding that such attacks may not abate. The company further states that much of its production is transported to market through critical chokepoints, including the Strait of Hormuz and the Suez Canal, which are “subject to political or armed conflict from time to time.”

Nevertheless, the world’s most profitable company has an undeniable appeal to investors, as the prospectus offers a reminder of oil’s fundamental importance to our everyday lives. As the world’s attention is captured by the technological wizardry of companies like Apple and Google, Aramco’s business model and primary product have remained largely unchanged since 1933. Oil remains a highly lucrative commodity—and the company that produces the most of it is still the most profitable in the world.

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