The prospectus for a $US10 billion ($14 billion) bond issued filed in London this week has provided the first detailed insight into the finances of the world’s most profitable company, one materially bigger than the next two most profitable businesses combined.
The prospectus was filed by Saudi Arabia’s Aramco for a debt raising to help finance the $US6.1 billion purchase of a 70 per cent interest in another Saudi government-controlled business, the Sabic petrochemical group.
Saudi Arabia's Aramco has filed a prospectus for a bond issue that reveals its finances for the first time.Credit: Bryan Denton/New York Times
It showed that Aramco had net income of $US111.1 billion last year, after paying $US101.7 billion of taxes to the Saudi government.
As reference points, the combined earnings of Apple and Goggle’s parent, Alphabet – the next two most profitable companies – were a touch over $US90 billion and the combined profits of the next six largest oil companies a touch under $US99 billion.
There appear to be several motivations for the Sabic deal and its funding.
One is to use Aramco’s powerful financial position – it has net cash of $US21.8 billion – to inject money into the Saudis’ sovereign wealth fund to enable it to diversify the kingdom’s asset base away from crude oil.
Another is to bulk up Aramco’s downstream activities to reduce its vulnerability to volatile oil prices and the longer-term risks posed by responses, like the electrification of transport, to climate change.
Perhaps of more immediate consequence is the exposure it will give Aramco in public debt markets.
The powerful Saudi Crown Price, Mohammad bin Salman, had explored an initial public offering of Aramco shares, openly musing about the potential to sell 5 per cent of the group to investors in 2016.
Disentangling Aramco’s finances from those of the state – it provides more than 60 per cent of all Saudi government revenues – proved more complicated than anticipated and the IPO was deferred into 2018.
Saudi Arabia's Crown Prince Mohammad bin Salman was prepared to defy Donald Trump to boost Aramco's earnings.Credit: AP
It then ran into a Twitter storm from Donald Trump, who accused the Saudi-led OPEC cartel of manipulating oil prices (who knew?) and complaining, in person as well, to the Saudis about the high price of US petrol. He urged them to increase production while reminding them, without any subtlety, that the US has defence relationships with key OPEC member states, including Saudi Arabia.
Talk of the IPO ceased while OPEC production rose, with the Saudis the major contributors to the increased volumes.
What OPEC hadn’t factored in was that, where they expected the US sanctions on Iran to have a dramatic impact on its output, the US granted waivers from the sanctions to some of Iran’s key customers, including China, until May this year. The market was over-supplied and prices fell from last year’s high of more than $US86 a barrel in October to about $US50 a barrel in December.
OPEC and its affiliates ignored Trump and late last year agreed to cut 1.2 million barrels a day from their output, with the Saudis and, to a much lesser degree Russia, doing most of the heavy lifting. The price has rebounded to a year-high above $US69 a barrel this week.
The Aramco prospectus provides some insight into why the Saudis might have decided to risk the wrath of Trump.
In 2016, oil prices slumped below $US30 a barrel – they averaged about $US45 a barrel that year – as a result of the ill-conceived OPEC attempt to drive US shale production from the market by flooding it with increased production in 2014.
In 2016 Aramco was only modestly profitable, with net income of about $US13 billion and free cash flows of only $US2 billion. Last year, with the Brent crude prices averaging just above $US70 a barrel, its free cash flows were $US86 billion.
That says Aramco’s profitability is more sensitive to oil prices, at least within the range within which oil traded between 2016 and 2018, than it is to production volumes.
Given the Saudi government’s reliance on Aramco for its revenues to fund its programs and maintain the finances and position of a family that has ruled the kingdom for more than 80 years, the decision to pursue price over volume to maximise its profitability is rational.
If Prince Mohammad were planning to have another crack at floating Aramco, boosting its profitability and, via the Sabic transactions, creating a less volatile core earnings stream, would provide a further incentive.
The first attempt at selling 5 per cent of Aramco to private investors occurred when oil prices were depressed.
While, even if today’s prices could be sustained indefinitely, it is unlikely the market would value Aramco at the prince’s ambitious target of $US2 trillion, it would obviously be worth more at sustainably higher oil prices and with a bulked-up downstream business than it was on 2016.
The decision to launch a bond issue to fund the Sabic deal by a company with no net debt suggests the Saudis see the bond issue as a backdoor approach to familiarising investors with Aramco’s financials and operations. We might yet see the listing of the world’s most profitable company.