Tuesday, September 21, 2021

Fitch Revises Saudi Aramco’s Outlook to Stable; Affirms IDR at ‘A’

Fitch Ratings has revised Saudi Arabian Oil Company’s (Saudi Aramco) Outlook to Stable from Negative while affirming the company’s Long-Term Issuer Default Rating (IDR) at ‘A’.

The revision of the Outlook on Saudi Aramco’s IDR is driven by a similar action on the sovereign. The company’s IDR is constrained at that of its majority shareholder Saudi Arabia (A/Stable), given close links between the company and the sovereign. We assess Saudi Aramco’s Standalone Credit Profile (SCP) at ‘aa+’.

Saudi Aramco is the world’s largest oil producer and the national oil company of Saudi Arabia. Its financial profile benefits from strong pre-dividend free cash flow generation (FCF) and recently increased but still conservative leverage. Its business profile is characterised by large scale production, vast reserves, low output costs and expansion into downstream and petrochemicals. Its upstream operations are focused on a single country and, compared with global oil and gas majors, its operations are skewed towards crude oil production.

KEY RATING DRIVERS

Sovereign Constrains Rating: Saudi Aramco’s rating is constrained by that of Saudi Arabia in accordance with Fitch’s Government-Related Entities (GRE) Rating Criteria and Parent and Subsidiary Linkage (PSL) Rating Criteria. This reflects the influence the state exerts on the company through strategic direction, taxation and dividends, as well as regulating the level of production in line with OPEC+ commitments. Saudi Aramco’s ‘aa+’ SCP is contingent on the company’s ability to maintain net leverage below 1x through the cycle.

Conservative Financial Profile: 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 0.6x, versus Royal Dutch Shell plc’s 1.1x (AA-/Stable), TotalEnergies SE’s 1.4x (AA-/Stable) and BP plc’s 2.0x (A/Stable) and that it will remain comfortably below 1x in 2022-2024. At end-2019 Saudi Aramco was in a net cash position, and the increase in leverage has been largely driven by its acquisition of Saudi Basic Industries Corporation (SABIC).

Response to Coronavirus Crisis: Saudi Arabia has agreed with other OPEC+ countries to make significant production cuts in 2020-2022 to re-balance the market. In 2020, Saudi Aramco’s liquids production fell around 7% yoy and we expect it will gradually rebound throughout 2021-2022; however, the company has benefited from stabilised oil prices. Saudi Aramco scaled back its capex budget to USD27 billion in 2020, down 18% yoy, which was similar to the cuts announced by other global oil majors.

Ambitious Dividend Target: Saudi Aramco has an ambitious target of paying at least USD75 billion in annual dividends. We estimate that under our oil price assumptions Saudi Aramco’s capex and dividend payments should be covered by operating cash flows, provided its capex does not exceed USD35 billion-USD40 billion. We assume that Saudi Aramco has the flexibility to reconsider its dividend commitment in case oil prices fall or capex is higher than we currently assume, e.g. as a result of Saudi Aramco’s participation in the Shareek programme recently announced by the state and aimed at incentivising domestic investments.

Strong Business Profile: Saudi Aramco’s business profile is very strong. Its lifting costs (USD3/boe in 2020) and upstream capex (USD4/boe) are much lower than those of international integrated majors and some national oil companies – a significant advantage in times of volatile oil prices. The business profile also benefits from a very large scale of production and long proved reserve life in excess of 50 years. However, it is more exposed to energy transition risk than oil majors, particularly in Europe, as it is less integrated into natural gas and has no plans to diversify into renewables on a large scale. This exposure is partially offset by Saudi Aramco’s low cost base.

Robust Profitability: In 2020, Saudi Aramco’s funds from operations (FFO) per barrel of oil equivalent amounted to USD15/boe, comparable to Shell’s USD18/boe and TotalEnergies’ USD15/boe. In absolute terms, Saudi Aramco generated USD69 billion in FFO, well in excess of that generated by any other oil company globally.

DERIVATION SUMMARY

Saudi Aramco’s rating is constrained by that of the sovereign, given strong ties between the two. In 2020, Saudi Aramco’s liquids production and total hydrocarbon production averaged 10.4 million barrels of oil equivalent a day (mmboepd) and 12.4mmboepd, respectively, well ahead of the upstream output of global and regional integrated producers, such as Abu Dhabi National Oil Company (AA/Stable), Shell, TotalEnergies and BP.

KEY ASSUMPTION

– Brent crude oil prices: USD63/bbl in 2021, USD55/bbl in 2022 and USD53/bbl in 2023-2024

– Upstream production recovering to around 13mmboepd by 2022

– Annual dividend pay-out of USD75 billion until 2024

– Capex at USD35 billion-USD37.5 billion per annum in 2021-2024

RATING SENSITIVITIES

Saudi Aramco

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– A positive rating action on Saudi Arabia would be positive for Saudi Aramco’s Long-Term IDRs

– An upward revision of the SCP is unlikely given the inherent volatility of the oil and gas industry and Saudi Aramco’s upstream production concentration in a single country

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– A negative rating action on Saudi Arabia would be negative for Saudi Aramco’s Long-Term IDRs

– Weakening of the linkage between Saudi Aramco and the sovereign (which we believe is unlikely), coupled with significant deterioration of Saudi Aramco’s SCP

– FFO net leverage rising to above 1x on a sustained basis due to, for example, sustainably negative free cash flow (FCF) driven by high capex, or large acquisitions, which may be negative for the SCP but not necessarily for the IDRs

– Accelerated energy transition leading to lower global oil demand may be negative for the SCP but not necessarily for the IDRs

– Deterioration of Saudi Aramco’s relative position to local peers (which we deem to be unlikely) could be negative for the company’s National Long-Term Rating.

Saudi Arabia

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Public Finances: Larger deterioration than we forecast in the overall public finance position reflected in higher government debt/GDP or drawdowns of government assets.

Public Finances: Significant increases in contingent liabilities that undermine the strength of the public-sector balance sheet, for example, as a result of a sustained rise in government-related entities debt particularly if this might not result in productive investments in the economy.

Structural Features: A major escalation of geopolitical tensions that affects key economic infrastructure and activities over an extended period.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Public Finances: Fiscal consolidation that accelerates progress towards a sustainable fiscal balance, including lower fiscal break-even oil prices, or a sustained rise in oil revenue that improves the public-sector balance sheet.

External Finances: An improvement of Saudi Arabia’s already strong external position, as reflected in sovereign net foreign assets/GDP, net external debt/GDP and Saudi Arabian Monetary Authority reserve metrics.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: As of end-2020 Saudi Aramco’s cash and cash equivalents (about USD55 billion) were more than sufficient to cover two-year debt maturities (about USD38 billion, excluding lease liabilities). Our assessment of Saudi Aramco’s financial flexibility also incorporates the company’s strong pre-dividend FCF, low debt levels, proven access to international debt markets and strong links with the sovereign. Since the beginning of the year Saudi Aramco attracted USD12.4 billion by selling a 49% interest in its oil pipeline (which Fitch does not treat as debt), and USD6 billion in a debut Sukuk issue.

ISSUER PROFILE

Saudi Aramco is the largest oil producer globally by volume and the exclusive oil producer in Saudi Arabia, except in the Saudi-Kuwaiti neutral zone.

SUMMARY OF FINANCIAL ADJUSTMENTS

– We reclassify USD3.4 billion of Fitch-calculated lease expenses to operating expenses, and remove around USD14.5 billion of leases from Saudi Aramco’s debt

– We add obligations associated with Saudi Aramco’s guarantee of Petro Rabigh’s equity bridge loan to adjusted debt

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATIN

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

Saudi Aramco’s rating is constrained by the sovereign’s

ESG CONSIDERATIONS

Fitch does not provide separate ESG scores for Saudi Aramco as its ratings and ESG scores are derived from its parent. ESG relevance scores and commentary for the parent – Saudi Arabia
Source: Fitch Ratings

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