Aramco’s debt is too enticing for Wall Street to overlook
Bankers love Saudi Arabia’s state oil producer Aramco, and who can blame them. The company received more than $100bn (£77bn) of orders for its debut $12bn bond this week, defying lingering concerns over the kingdom’s internal stability and the future trajectory of oil prices. Its success is more proof that oil will remain the life blood of the global economy for many decades to come.
The world’s largest single producer of crude is an enticing morsel for bond investors because of the fundamentals underpinning its core business. Aramco has the capacity to pump up to 12.5m barrels per day of crude if required, accounting for a significant chunk of the daily 100m barrel oil market. Few companies are as vital to the economic prosperity of all humanity, despite the claims of climate change campaigners that the end of the oil age is nigh.
In a world where oil investment is becoming socially too toxic for some institutional investors to handle, Aramco’s debt has still proved too enticing for Wall Street to ignore. There is no shortage of buyers for Saudi Arabia’s crude, and prices pushing above $70 per barrel make its oil producing giant’s debt even more appealing.
The company is also insanely profitable. A rare glimpse of its balance sheet shown to investors ahead of its bond debut showed a company three times the size of technology giant Apple. The $111bn the company made in net profit last year makes it bigger in sheer earnings power than Exxonmobil, Shell and BP combined.
Aramco is also efficient, producing crude for as little as $3 per barrel, compared with around $40 per barrel in the North Sea. And it has no shortage of black gold left in the ground to produce. Saudi Arabia’s oil reserves, which it has almost exclusive access to, are also vast. The country holds more than 263bn barrels of
proven oil underground. Compare this to Britain, which is down to its last 20bn barrels as it squeezes every last drop from Scotland’s frigid North Sea.
Despite the growing popularity of electric vehicles, the technology’s ability to replace the petroleumfuelled combustion engine is often overstated. The International Energy Agency predicts there will be 300m EVS on the world’s roads by 2040, but this figure still only displaces 3.3m barrels per day of oil demand growth.
However, Aramco isn’t just about supplying oil. The company is buying a 70pc stake in Sabic, the Middle East’s largest petrochemical and plastics producer, from the Saudi government. The deal provides more money for the kingdom to fund economic reforms and increasingly glues Aramco to the fast-growing manufacturing economies of Asia, such as China and India, where the company is also investing billions to build new refineries.
“With petrochemicals demand expected to grow faster than traditional refined products such as transportation fuels, both IOCS [international oil companies] and NOCS [national oil companies] are likely to continue to invest in petrochemical infrastructure to diversify their portfolios and align their long-term financial prospects with anticipated product demand,” says Jennifer Van Dinter, global head of petrochemicals at S&P Global Platts Analytics.
Despite all these strengths, Aramco and the kingdom as a whole are still viewed as a risk by some investors. The international financial community’s nerves have been shaken by the government’s response to the alleged assassination last year of dissident journalist Jamal Khashoggi. His death followed a year of turmoil and intrigue in Riyadh after Crown
‘Aramco is a hard sell with funds that are weighing environmental, social and governance issues’
Prince Mohammed bin Salman ordered the arrest of hundreds of his own family in a sweeping corruption probe. The Crown Prince – known as MBS – is also the architect of Aramco’s stalled plan to float shares, which was intended to raise $100bn from the sale of a 5pc stake. He wished to use the proceeds to fund ambitious economic development plans to diversify the kingdom’s economy away from oil. However, his alleged role in the Khashoggi scandal and rapid rise as heir apparent to the Saudi throne has caused anxiety both within the kingdom and outside. All this uncertainty fed doubts about the long-term plan for Aramco.
Oil companies have also become less appealing to institutional investors. Norway’s $1 trillion sovereign wealth fund said last month that it would divest its holdings in oil and gas explorers, excluding BP and Shell, which have sizeable renewable energy divisions. Despite the size of its earnings, Aramco is a hard sell with funds that are increasingly weighing environmental, social and governance (ESG) in their investment decisions.
Then there is the issue of Aramco’s independence and its inextricable link to the kingdom’s oil policies. As the de facto leader of Opec, Saudi Arabia is bearing the brunt of US president Donald Trump’s complaints about oil prices climbing too high for the global economy to take.
Accounting for about a third of Opec’s total production, Aramco could easily find itself at the centre of any future political storms surrounding the cartel’s policies. The group could still be effectively outlawed by US politicians if so-called “Nopec” legislation is ever passed. Although support for the bill is fairly tepid, if it becomes law it could make Aramco look too toxic for squeamish Wall Street investors to touch.
Despite these worries, money talks. Aramco’s recent bond sale success proves that the age of oil won’t end soon.