Aramco posted $224bn EBITDA in 2018, will pay for SABIC in instalments

Author: Tom Brown

2019/04/01

LONDON (ICIS)--Saudi Aramco generated earnings before interest, taxes, depreciation and amortisation (EBITDA) of $224bn in 2018, and intends to finance its purchase of SABIC in instalments, according to new disclosures from ratings agencies Fitch and Moody’s.

Source: Ali Haider/EPA/REX/ShutterstockIn the first issued credit profile ratings of the Saudi state oil and gas firm ahead of an anticipated bond issue to finance part of the $69.1bn purchase price for 70% of SABIC, the company revealed that it intends to pay down part of the purchase price in tranches between 2019 and 2021.

The company is expected to raise at least $10bn towards the purchase of SABIC through a bond issue this year.

Aramco is likely to be in a position to fund the purchase primarily through its free cash flow, with the majority stake in SABIC to contribute around $8bn to the company’s funds from operations once the deal has been completed, according to Fitch.

“Saudi Aramco's substantial cash flow generation capacity and financial flexibility will enable the company to fund the SABIC acquisition without the need to materially leverage-up its balance sheet even under weak oil price scenarios,” Moody’s said in the ratings rationale.

In a rare glimpse at the underlying financial metrics of the secretive producer, which represents the backbone of the Saudi economy, Aramco revealed to the agencies that its cash reserves as of the end of 2018 stood at $48.8bn compared to $27bn in reported group debt, while its earnings margin stood at 63.7%.

The company benefits from large operational scale and substantial downstream integration, with a conservative financial profile and leverage that is expected to remain low even factoring in the SABIC purchase.

Both agencies awarded Aramco a rating at the high end of their scales, but in both cases the extent of the company’s ties to the government of Saudi Arabia led to a slight markdown from its creditworthiness as a standalone company.

Fitch assigned an A+ rating, reflecting “strong links between the company and the sovereign, and the influence the state has on the company through regulating the level of production, taxation and dividends.”

Aramco is the world’s largest oil and gas firm, producing 10.3m bbl/day of crude oil and a maximum capacity of 12m bbl/day, of with 38% in 2018 was consumed by its downstream business.

The company is less integrated into natural gas and downstream production than many of its international peers, and is less geographically diversified than its rivals as its upstream reserves are all located within the Kingdom, Fitch added.

Aramco accounted for 70% of Saudi Arabia’s budget revenue proceeds in 2015-17, and moves by the government to reduce Aramco’s tax rate to 50% from 85% increased the per-barrel profitability of its upstream operations.

Current funds flow from operations (FFO) stands at $26/bbl oil equivalent (boe), higher than Russian incumbents but lower than western peers Shell and Total.

(Pictured: Saudi Arabia's Khurais oil field (Source: Ali Haider/EPA/REX/Shutterstock)