Falling Crude Oil Prices Hurting Fragile Business Model
According to various media reports, Aramco hired banks including Goldman Sachs, Citi, HSBC, JPMorgan, Morgan Stanley, and NCB Capital to start contacting investors ahead of the planned transaction, the oil company said in a filing with the national stock exchange.
So far, the oil titan didn’t disclose details of the proposed issuance. Gulf issuers have already broken the record from last year and issued over $100 billion.
Aramco went for a multi-tranche issuance that involves tranches for 3, 5, 10, 30, and 50 years, in accordance with market circumstances. Usually, benchmark bonds amount to a minimum of $500 million per tranche.
“The backdrop is supportive,” a debt banker said and mentioned a $1 billion Islamic bond offering issued by the Dubai Islamic Bank a week ago, which registered record low yields.
Aramco is looking to secure capital to pay $37.5 billion in dividends for the second half of this year. The oil company is also looking to finance its takeover of 70% of Saudi Basic Industries (SABIC) for $69.1 billion, which will be funded in installments for the next eight years. So far, Aramco has secured $10 billion in loans this year.
“In a world searching for yield, there should be no shortage of demand. But persistent low oil prices and the threat that poses to long-term cash generation should be reflected in pricing,” said Hasnain Malik, chief equity strategist at Tellimer.
Saudi Aramco’s unpaid USD-denominated bonds traded at around 2.05% today, somewhat higher than Saudi government bonds. The filing pointed to various investment risks such as the persistent coronavirus pandemic and the Saudi government’s position on oil production and excess capacity.
“Saudi Aramco’s costs of complying with such decisions, may not [maximize] returns for Saudi Aramco,” the filing showed, referring to potential oil production limitations.
Crude oil prices are trading 32% lower since the beginning of the year.
Fitch Downgrades Rating to Negative
Fitch Ratings, the US-based credit rating agency, downgraded Aramco’s rating last week to negative from stable, following a similar move on the sovereign of Saudi Arabia, which owns the majority of Aramco.
“Saudi Aramco's financial profile is conservative compared with that of international integrated oil producers. We project that at end-2021 Saudi Aramco's funds from operations (FFO) net leverage will be around 1.0x, compared with Royal Dutch Shell's 1.0x, Total SE's 1.4x, and BP plc's 2.2x,” Fitch said.
Aramco returned a big increase in the profit for the third quarter. After reporting net incomes of $6.6 billion for the second quarter and $23.2 billion for the first half of the year, Aramco declared profits of nearly $12 billion.
The oil giant declared a dividend of $18.75 billion for each of the second quarter and third quarter of this year. This is higher than $13.4 billion paid in the second quarter of the last year, in spite of the challenges the global economy faces due to the pandemic.
The company reported net incomes of $6.6 billion for the second quarter and $23.2 billion for the first half of the year, down from $24.7 billion and $46.9 billion in the same periods last year.
“We saw early signs of a recovery in the third quarter due to improved economic activity, despite the headwinds facing global energy markets,” Aramco President & CEO Amin H. Nasser said.
“We continue to adopt a disciplined and flexible approach to capital allocation in the face of market volatility. We are confident in Aramco’s ability to manage through these challenging times and deliver on our objectives.”
The state-owned oil giant Saudi Aramco hired several banks for a multi-tranche US dollar-denominated bond offering in a bid to recover its finances in the light of weak demand and low oil prices in 2020. Fitch downgraded Aramco’s rating to negative last week despite an improvement in the performance in the third quarter.
About the Author
Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.