The first full year of Saudi Aramco as one of the world’s largest public companies was marked by a crude price war, a global pandemic and a promise of decarbonization. The crisis showed both the flexibility promised by the company and the political role that has kept international investors at bay.
Despite low demand, commodity prices and margins, Aramco generated a healthy 13.2% yield on average capital employed, according to full-year results released Sunday. $ 49 billion of free cash flow was not yet enough to fund $ 75 billion in shares and acquire 70% of major chemical SABIC, moving the company from a cash position to net debt. . But it is still much lower than most producers.
A reversal of the price of oil this year will boost Aramco ‘s quarterly output, but not as much as that of its peers. Saudi officials ’decision in January to cut production by an extra million barrels per day was a means of boosting prices through the latest wave of the pandemic, but it will also affect futures -into Aramco. And higher prices are not always a resource for the company. The royalty of the marginal government it pays rises from 15% to 45% when the Brent benchmark is above $ 70 per barrel.
Controlled by Saudi Arabia, Aramco remains the global swing supplier. It is a balancing act: Regulators estimated that through the IPO a $ 1 barrel price increase of $ 1.5 billion would increase free cash flow, and that an additional 100,000 barrels per day would generate $ 1.1 one billion. Aramco currently has around 4 million barrels per day in additional capacity, compared to last year’s average oil production of 9.2 mbpd.
Saudi Arabia’s unilateral output cut held together the global cartel made up of the Organization of the Petroleum Exporting Countries, Russia and a few others. Demand for oil is recovering as economies reopen, but the path is uncertain, making it difficult for producers to agree on how to increase supply. There is also a risk that higher prices could force U.S. coal shale producers to relinquish their modern capital control. Moscow and Riyadh are at odds again, so keeping the cartel going will be a challenge. Aramco may still need to absorb more pain.
The close segments of the global peers had a less volatile year and are now trading near the first public offering price. Global investors have bought the group’s bonds but not many of their shares. That is very likely to change: 2020 only confirmed fears that political interference could force Aramco to take action against its own economic interests. A 4% quota yield is also low for the sector, partly due to the stock being overvalued relative to earnings.
The future of the oil industry is getting darker as promises of disarmament are dashed from companies and governments. With abundant resources and low costs, however, Aramco is likely to continue pumping oil longer than anyone else.
The world is still catching up to last year’s seismic changes and how they will affect industries such as oil and gas. But as Aramco is likely to continue to play its role as a major oil banker, its stock market lists more curiosity than reality for global investors.
The forces that fueled Aramco’s growth from a single source to the world’s largest oil producer are changing underfoot. Now that the company has sold shares, can it sustain the kind of growth needed to keep investors happy? WSJ explains. Photo: John Moore / AP (Video from 1/31/20)
Write to Rochelle Toplensky at [email protected]
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