Saudi Aramco Posts Strong Cash Flows, Boosting M and A Prospects

Oil & Gas
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Thursday, August 22, 2019   /10:46AM / By Fitch Ratings / Header Image Credit: Saudi Aramco 


Saudi Aramco's strong cash flow generation and its net cash position could support further acquisitions, Fitch Ratings says. The company's growth strategy focuses on vertical integration and includes its recent acquisition of a 70% stake in SABIC and the negotiations to acquire a 20% stake in Reliance Industries' refining and petrochemicals business. 

Aramco's ample cash flow generation capacity should support its efforts to enhance its vertical integration, including through acquisitions. While the company may attract additional debt to fund its announced and prospective acquisitions aimed at enhancing its downstream and petrochemical operations and securing long term demand for its oil, we expect them to be largely funded from internal sources. This is because of Aramco's conservative financial policy, its accumulated cash of USD52 billion, including short-term financial investments, and our expectation that it will continue to generate strong cash flows. Our base case forecasts the company's FFO-adjusted net leverage to remain at or below 0.5x, broadly in line with that of ADNOC, but significantly lower than that of Shell, Total and BP. 


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Aramco published its 1H19 results on 12 August. It generated USD55 billion in funds from operations and USD38 billion in free cash flow before dividends, compared with USD64 billion and USD36 billion in 1H18, respectively. It posted USD47 billion in net income, 12% lower yoy due to lower oil prices, which still confirms its status as the most profitable company globally. Aramco's strong cash flow generation capacity is the result of its very high level of production and low unit production costs and capex. These results are supportive of our credit views on Aramco (Issuer Debt Rating: A+/Stable, Standalone Credit Profile: 'aa+'). 

Saudi Aramco placed its debut USD12 billion bond in April 2019 and its gross debt increased from USD27 billion at 31 December 2018 to USD46 billion at 30 June 2019. But the company remained in a net cash position even after it had paid a record high dividend of USD46 billion, including the special portion. 

In March 2019, Saudi Aramco announced the acquisition of a 70% majority stake in SABIC for USD69 billion. This deal should diversify Aramco's cash flows and bring its vertical integration more in line with international peers. 

During a call with investors after posting its first-half results, Aramco confirmed it is holding negotiations with Reliance regarding buying a 20% stake in its refining and petrochemicals business, although the talks are at a preliminary stage. Reliance's chairman has said that the company's oil to chemical business could be valued at USD75 billion, including debt. We understand from Saudi Aramco that the equity valuation of the stake is yet to be determined. The deal is not legally binding and is subject to due diligence and shareholder approvals. The transaction would fit into Aramco's strategy of securing long-term demand for its oil and enhancing its vertical integration. 

India is one of the most rapidly growing petroleum markets. According to the US EIA, in the next 10 years its oil and oil products consumption will increase from 5.0MMbpd in 2018 to 6.6MMbpd in 2028, while demand in the US, Japan and Europe will shrink.


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