Aramco to take 20% stake in Indian oil refiner
Saudi Arabia oil giant said net income for the first half of 2019 was $46.9 billion
Saudi Aramco unveiled a $15 billion deal to expand its global refining footprint and held its first-ever earnings call with financial analysts, twin moves that could bolster investor confidence as the state-owned oil giant revs up plans to list shares.
Aramco said profit in the first half of 2019 fell nearly 12% from a year earlier, hit by lower oil prices. Despite the drop, its profit of $46.9 billion (U.S.) for latest period far exceeded that of any other reporting company—more than doubling, for example, Apple Inc.’s comparable earnings.
For years, the Saudi Arabian Oil Co., Aramco for short, has been playing with the idea of an initial public offering of a small slice of itself. Those plans bogged down amid disagreements over such matters as valuation and the venue for a listing.
More recently they have returned to the front burner thanks to a successful bond offering in April that people familiar with the matter said encouraged executives and Saudi officials over global investor appetite. Saudi officials also believe international outrage over last year’s murder of dissident journalist Jamal Khashoggi in the kingdom’s consulate in Istanbul is easing, according to people familiar with the matter.
The Wall Street Journal reported Friday that recently revived plans for a listing could be even more aggressive, at least in terms of timing, with a target date as soon as early next year. Saudi officials had previously said they were aiming for late 2020 or 2021.
Aramco finance chief Khalid al-Dabbagh said on Monday’s earnings call that the company was “ready” for an IPO, but that the timing was up to its shareholder, the kingdom of Saudi Arabia. “They will announce it depending on their perception of what would be the optimal market conditions,” he said.
Crown Prince Mohammed bin Salman, the day-to-day ruler of the kingdom, had previously announced plans to list 5% of Aramco at a roughly $2 trillion valuation. Even that small slice, amounting to some $100 billion at that valuation, would dwarf any previous IPO.
The road to a listing still has many hurdles, including some of the same issues that hampered the last push. Saudi officials are again debating a proper valuation, according to people familiar with the matter. A decision on where to list—among a handful of possible international stock exchanges, or at home—is still up in the air.
The earnings call Monday was widely seen as a warm-up to more routine investor communications, following the bond offering and ahead of any IPO. Aramco released considerable financial detail earlier this year in a prospectus for selling its bonds, but disclosure remains partial.
Monday’s call and presentation was limited to broad-brush discussions focused on headline profit, cash flow and capital expenditure numbers, while staying clear of any deeper analysis of company financials. Analysts didn’t use the full hour allotted for the call, journalists weren’t allowed to ask any questions, and Aramco representatives weren’t available to comment afterward.
“Typically, you would expect a lot more from a listed company,” said Richard Segal, credit analyst at Manulife Asset Management. “We can’t really draw many conclusions from what they published this morning, but it’s a good start.”
One head scratcher: Aramco said it would pay a special dividend of $20 billion to its owner, the kingdom of Saudi Arabia, because of the company’s strong performance in 2018. This is in addition to an ordinary dividend of $26.4 billion for the first half. The combined payments were much larger than the bond prospectus had noted in April.
Aramco didn’t disclose on the call where that extra cash had come from, and Mr. Segal said the jump in dividends was a surprise.
“We have a flexible capital investment program that enables us to moderate our spending in times of low oil prices to ensure the stability of the dividend,” the company said in an emailed statement.
Distributions to Riyadh have varied widely over the years, depending on oil prices.
“Clearly the Saudi government requires a high percentage of funds distribution given the sizable budget deficit this year,” Bernstein Research said in a note.
The International Monetary Fund said in May that Saudi Arabia’s budget deficit would widen to 7% of gross domestic product in 2019 as the result of higher government spending, well above the government’s forecast of 4.2%. The IMF estimates that Saudi Arabia needs Brent crude prices of between $80 and $85 a barrel to balance its budget. Currently Brent is trading below $60 a barrel.
The earnings call came after Aramco said it had agreed to buy a 20% stake—worth some $15 billion including debt—in the oil and chemicals business of India’s Reliance Industries. The deal, representing one of Aramco’s biggest forays overseas, could reassure potential stock-market investors that the company is diversifying from its heavy dependence on pumping Saudi crude.
The company has orchestrated several deals in recent years aimed at boosting its refining capacity abroad while also building new domestic capacity. Aramco has signaled it is trying to become more like Exxon Mobil Corp. or Chevron Corp., which refine and process as much oil in their “downstream” businesses as they pump upstream.
Aramco decided it needed a deal “to leapfrog us to being a major downstream player,” Mr. al-Dabbagh, the chief financial officer, said on the call.