2021.03.23 12:30 Posted by Someone

Oil Giant Aramco’s Shares Remain a Curiosity - WSJ




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Oil Giant Aramco’s Shares Remain a Curiosity

Despite robust operating results, investors have no more reason to buy into the Saudi oil giant than they did at the 2019 initial public offering

The forces that propelled Aramco's growth from a single well to the biggest oil producer in the world 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) By Rochelle Toplensky Close

Rochelle Toplensky

Biography @rtoplensky rochelle.toplensky@wsj.com March 22, 2021 9:11 am ET

Oil giant Saudi Aramco’s first full year as one of the world’s largest public companies was marked by a crude price war, a global pandemic and proliferating decarbonization promises. The crisis showed both the resilience that the company promised and its political role that has kept international investors away.

Despite low demand, commodity prices and margins, Aramco generated a healthy 13.2% return on average capital employed, according to full-year results released Sunday. Free cash flow of $49 billion still wasn’t enough to fund $75 billion in dividends and its acquisition of 70% of chemical giant SABIC, shifting the company from a net-cash position into net debt. Yet it remains much less leveraged than most producers.

The oil-price rebound this year will boost Aramco’s next quarterly results, but not as much as those of its peers. Saudi officials’ January decision to cut its production by an additional million barrels per day was instrumental in supporting prices through the latest wave of the pandemic, but will also hit Aramco’s revenue. And higher prices aren’t always a boon for the company. The marginal government royalty it pays rises from 15% to 45% when the Brent benchmark exceeds $70 a barrel.

Controlled by Saudi Arabia, Aramco remains the globe’s swing supplier. It is a balancing act: Management estimated during the IPO that a $1 a barrel price rise would add $1.5 billion to free cash flow, while 100,000 more barrels per day would generate $1.1 billion. Aramco currently has around 4 million barrels per day in spare capacity, compared with last year’s 9.2 mbpd average oil output.

Saudi Arabia’s unilateral production cut kept together the global cartel comprising of the Organization of the Petroleum Exporting Countries, Russia and a few others. Oil demand will recover as economies reopen, but the path is uncertain, making it complicated for producers to agree how to increase supply. There is also a risk that higher prices might entice U.S. shale producers to abandon their newfound capital discipline. Moscow and Riyadh are at odds once again , so keeping the cartel functioning will be a challenge. Aramco may have to absorb more pain yet.

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