Aramco rises in times of crisis

Aramco rises in times of crisis

Despite all the challenges such as oil price volatility, uncertainty caused by the ongoing Russian-Ukrainian crisis and the economic slowdown resulting from the pandemic, Saudi Aramco remains among the top performers in the energy league.

The oil giant’s performance is evident in its 2021 financial results. Aramco’s low-cost base and flexible operating structure enabled the company to navigate the 2020 period quickly and successfully to deliver the strong 2021 results, aided by rising oil prices.

Operating profit was $205.6 billion in 2021, well above the $102.1 billion in 2020 and $179.9 billion in 2019 before the pandemic. Net income was $110 billion in 2021, well above many analysts’ estimates.

These numbers bode well for the company on a number of fronts, particularly the well-received additional fundraising in international capital markets. The effort should gain traction if Aramco decides to borrow more this year at competitive lending rates, which Aramco and the Saudi ruler still benefit from. The oil giant has successfully secured a combination of traditional and sukuk bonds with those listed on the London Stock Exchange, affirming a vote of confidence in Aramco’s ability to list these securities on major stock exchanges.

Aramco also set new benchmarks in Islamic borrowing and raised $6 billion in sukuks in the second quarter of 2021, the world’s largest backlog of US dollar-denominated sukuks.

The company’s leverage ratio – the increase in the degree to which Aramco’s operations are financed with debt – fell to 14.2% in 2021 from 23% the year before, which these potential lenders will still appreciate. once compared to other low-capital domestic energy companies. The decline was driven by higher cash flow from operations, reflecting higher oil prices, improved refining and chemical margins and the consolidation of SABIC results.

Aramco’s free cash flow, another closely watched financial ratio for lenders, is one of the strongest compared to other energy peers, reaching $107.5 billion in 2021 from $49.1 billion in 2020. The position helps Aramco assess the cash available for financing activities, including its highly anticipated dividend payouts since its IPO in 2019 and allaying initial doubts about maintaining its dividend payout policy in the face of the fall in oil prices. Aramco’s dividend yield of 3.43% versus the industry average of 3.15% again puts it in a different league. The public company has pledged to maintain its current annual payout of $75 billion even during the time of COVID 2020, boosting the confidence of existing and potential investors. Aramco’s board of directors recommended that $4 billion of retained earnings be capitalized and bonus shares distributed to shareholders, reflecting strong earnings performance in 2021.

The company has reassessed its operating model, and one of them is to divest some of its asset infrastructure while focusing on its core business. This new business model approach has contributed to Aramco’s financial results, such as completing a $12.4 billion infrastructure asset sale in June 2021 regarding a 25-year leaseback and leaseback agreement. years with global financial partners from the United States, China and Saudi Arabia for its stabilized crude oil pipeline network. The company also closed another $15.5 billion gas pipeline deal with consortia of international and domestic investors, which acquired a 49% stake in Aramco Gas Pipelines Co.

In all of these transactions, Aramco retains full ownership and operational control, and the agreements impose no restrictions on Aramco’s production volumes by giving Aramco the operational flexibility to produce oil in accordance with the agreement’s quotas. OPEC+, which has been an important stabilizing force in the market during the most recent price volatility, driven primarily by geopolitical speculation by hedge funds.

Aramco’s latest financial results are also backed by some of the world’s largest energy reserves estimated at 255 billion barrels, enabling the Saudi oil company to produce around 9.2 million bpd in 2021 and 2020, up from 9.4 million. bpd in 2019. The company maintains maximum sustainable capacity of 12 million bpd – the highest among OPEC producers – with a planned increase to 13 million bpd by 2027.

This view positions Saudi Arabia as the world’s largest oil supplier for many years, making it the world’s unofficial oil central banker. It is no wonder that governments around the world are heading to Riyadh to urge the Kingdom to increase oil production during the current oil supply uncertainties due to the Russia-Ukraine crisis.

But Aramco is not standing still to rely solely on oil sales, knowing that future calls to control fossil emissions will inevitably affect its business and profitability, leading to stranded resources unless it can diversify its energy mix. . The oil giant is actively diversifying its energy sales; it operates a strategically integrated global downstream business in refining and petrochemical manufacturing, adding new cleaner blue and green hydrogen power capacity.

Today, Aramco has gross refining capacity of approximately 6.5 million bpd and 53.1 million tonnes per year of net chemical production capacity. Its chemical activity is now present in 50 countries following the acquisition of SABIC.

Local and international investors see the current and long-term value of investing in the company as there are rarer opportunities for less risky investment outlets, especially in heightened geopolitical tensions. The company’s global energy preeminence has been reflected on the Saudi stock market, with market capitalization closing at $1.877 trillion in 2021 and currently hovering at $2.28 trillion. It competes with Apple to become the most capitalized company in the world and perhaps even surpass it.

The state-owned oil major has also pledged to invest for the long term, building on its low-cost, low-carbon performance to achieve net-zero greenhouse gas emissions by 2050 with new supplies. energy sources in blue and green hydrogen and by incurring capital expenditure in all these areas. The company has also expanded its gas exploration, amounting to $31.9 billion in 2021, from $26.2 billion in 2020. Aramco said it aims to increase capital spending to $40-50 billion. in 2022, with additional growth expected until the middle of the decade, another sign of its confidence to be the world’s leading energy supplier on a sustainable basis.

With oil prices well above 2021 average levels and reaching between $85 per barrel and $130 per barrel in the first quarter of 2022, Aramco’s upcoming quarterly financial statements for 2022 will break new financial records, making Aramco one of the most valuable energy companies that overcame the COVID-19 downturn of 2020, surpassing previous highs of 2019.

The announced transfer of 4% of Aramco’s shares to the Public Investment Fund in 2022 will not affect the company’s operations, strategy, dividend policy and governance, with the state remaining the largest shareholder with 94 % of Aramco shares after the transfer. The company certainly makes a compelling case study for standing up in times of crisis.

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.

Disclaimer: The opinions expressed by the authors in this section are their own and do not necessarily reflect the views of Arab News

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