State-run company can generate profit like no other company on Earth. Why then did it only get a A+ rating?
The first official glimpse of Saudi Aramco’s financial performance confirms the state-run oil giant can generate profit like no other company on Earth: net income last year was US$111.1 billion, easily outstripping U.S. behemoths including Apple Inc. and Exxon Mobil Corp.
The company is preparing to raise debt in part to pay for the acquisition of a majority stake in domestic petrochemical group Sabic, worth about US$69 billion. The deal is a Plan B to generate money for Saudi Arabia’s economic agenda after an IPO of Aramco was postponed. In effect, Crown Prince Mohammed bin Salman is using the firm’s pristine balance sheet to finance his ambitions.
The kingdom’s dependence on the company to finance social and military spending, as well as the lavish lifestyles of hundreds of princes, places a heavy burden on Aramco’s cash flow. Aramco pays 50 per cent of its profit on income tax, plus a sliding royalty scale that starts at 20 per cent of the company’s revenue and rises to as much as 50 per cent with the price of oil.
Aramco reported funds flow from operations — a measure closely watched by investors and similar to cash flow from operations — of US$26 a barrel equivalent of oil last year, according to Fitch. That’s below what Big Oil companies such as Shell and Total SA enjoy, at US$38 and US$31 per barrel, respectively.
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