Saudi Aramco assigned first credit ratings: Update

Add analysis

Ratings agencies Fitch and Moody's Investors Service have assigned credit ratings to Saudi Arabia's state-owned Saudi Aramco for the first time, offering a rare glimpse into the financial performance of the world's largest oil company.

The ratings have been published ahead of Aramco's debut on the international bond markets. The company plans to issue its first US dollar-denominated debt to help finance its proposed $69.1bn acquisition of Saudi petrochemicals company Sabic.

Aramco confirmed last week that it is to buy a 70pc stake in Sabic. "It should help diversify earnings while having a limited impact on Saudi Aramco's leverage. Overall, we view the transaction as rating neutral," Fitch said.

Fitch has assigned Aramco an A+ rating, while Moody's has given the firm A1. Both agencies regard Aramco's close links to the state as a barrier to a triple A rating.

"Saudi Aramco's rating is constrained by that of Saudi Arabia (A+/stable). This reflects the influence the state exerts on the company through taxation and dividends, as well as regulating the level of production in line with its Opec commitments," Fitch said.

"While there is a clear track record of Saudi Aramco having been run as a commercially independent company, the government's budget is highly reliant upon contributions from Saudi Aramco in the form of royalties, taxes and dividends," Moody's said.

Fitch says that if Aramco were to be run as a purely commercial entity, free of its government links, its standalone profile would correspond to AA+, "at the upper boundary of the Fitch rating spectrum for oil and gas companies." It adds that this "reflects the company's high production, vast reserves, low production costs and very conservative financial profile."

The Saudi government plan to list up to 5pc of Aramco's value is unlikely to substantially change the company's valuation, because it will continue to be 95pc owned by the state, and large upstream projects and production levels will almost certainly remain sovereign decisions.

Moreover, Aramco's initial public offering (IPO) — first announced in 2016 and initially expected to take place last year — has been delayed till 2021 at the earliest. Aramco officially said the delay was caused by the need to focus on acquiring Sabic, but even with that acquisition agreed last week, the IPO is unlikely to be brought forward.

One reason for the delay of the IPO may be the company's independent valuation, which crown prince Mohammad bin Salman – the architect of the country's economic transformation plan and of the scheme to part-privatise Aramco – had expected to be at least $2 trillion, with the IPO netting the government some $100bn.

An independent valuation was never announced, but almost certainly came in substantially lower than $2 trillion, and the sale of the government's share in Sabic to Aramco at $69.1bn – with Aramco funding the purchase through borrowing – will provide the government with the bulk of the cash it was seeking.

The Fitch and Moody ratings – below the top tier of global oil and gas companies – seem to confirm the company's lower-than-expected overall valuation.

Fitch also points out that Aramco is "less integrated into natural gas and downstream than some of its international peers", although Aramco's recent acquisition of petrochemicals giant Sabic "would somewhat improve" that situation.

Aramco's stated goal is to double its natural gas production to 23bn ft³/d over the next decade, and its chief executive Amin Nasser said last month that he expects Saudi gas exports of 3bn ft³/d to begin well before 10 years elapse.

Aramco is also planning to become involved in international upstream LNG projects, and is already discussing participation in Russian independent Novatek's 19.8mn t/yr Arctic LNG 2 project. And the company concluded a preliminary agreement with Abu Dhabi's state-owned Adnoc in November to cooperate on gas and LNG trading opportunities, particularly in fast-growing markets in Asia-Pacific.

The ratings agencies provide some insight into the strength of Aramco's finances. The company delivered $121bn of operating cash flow last year, invested just over $35bn and paid out more than $58bn in dividends, according to Moody's. It ended 2018 with $27bn of debt and almost $49bn of cash reserves.

ExxonMobil, the largest of the oil majors, by comparison generated $36bn of operating cash flow, invested $26bn and paid $14bn in dividends last year. It had nearly $38bn of debt and $3bn of cash reserves at the end of 2018.

Aramco produced 10.3mn b/d of crude last year, including "blended condensate", according to Moody's. "About 38pc of the crude oil production in 2018 was consumed by Saudi Aramco's downstream business. Investment in the downstream sector is a key strategic focus for the company as it is a means to secure end markets for its oil production and capture value across the hydrocarbon chain," Moody's said.