The Chinese oil majors offer better value for investors.
After so many years of secrecy around Saudi Aramco, it’s still a thrill more than a year after the IPO, to be able to peruse the financial results of the world’s biggest oil company, published today. There wasn’t reason to expect much. Aramco CEO Amin Nasser described 2020 as “one of the most challenging years in recent history.”
It started, of course, with the Saudis and Russians bizarrely jockeying over market share as global demand collapsed amid Covid-19 lockdowns. Unable to slam on the breaks, oil companies filled up storage capacity to the point that spot prices for crude oil went negative in April 2020.
So it was no surprise that Aramco revenues fell by nearly a third to $205 billion in 2020. Cash provided by operations fell to $76 billion from $111 billion in 2019.
Many big companies cut dividends last year—with Occidental Petroleum OXY all but abandoning its payout amid mounting debt. Not Aramco, which paid out a $70 billion dividend, nearly all of its cash flow—directly into the coffers of the government, which owns more than 98% of the company. (In its December 2019 IPO, Aramco sold 3.45 billion shares—just 1.73%.)
At a lesser company the means by which Aramco has been able to afford that dividend would raise eyebrows. Aramco has made $25 billion of new borrowings over the past couple years.
Whether such payouts can continue depends upon oil prices. At $60 oil Aramco can break even after funding cap ex ($35 billion in 2021) and dividends. If oil sags lower than that, either the King will have to settle for less, Aramco will have to spend less, or it will need to take on more debt. Aramco says it has already cut manpower by 10% and has signaled the sale of interests in JV refineries with PetroChina and Total as a future source of funds. They have also delayed work on refineries and announced an indefinite pause in a vast crude-to-chemicals complex in the Kingdom.
Enough investors shoulder into Aramco’s thin float that they’ve bid up the share price to lofty levels of SAR35.55, or about $9.50 a share. This is too rich. Bernstein analysts Neil Beveridge and Oswald Clint say in a note today that “Saudi Aramco is trading in its own universe.” On an earnings basis, Aramco is the most expensive oil giant at 22.1 times 2021 expected earnings. That’s followed by Chevron CVX at 21.6x and Exxon at 20.6x.
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Other government-controlled oil giants are a fraction of Aramco’s value. With Petrochina PTR at a p/e of 10.8; while Russia’s Rosneft is 6x and Gazprom 4.4x. Russia needs only $43/bbl oil to balance its budget, according to Energy Aspects.
Rather than Aramco, Bernstein suggests buying the Chinese oil majors PetroChina, Sinopec and CNOOC, “which in our view offer some of the best value for global investors” and an average dividend yield of 7.1%.
No doubt that Aramco has some of the world’s greatest oil assets. Bernstein Research figures sufficient technically available reserves to maintain 10 million bpd for 50 years. But what’s the real value of a barrel of oil that you won’t get around to producing for 40 years? And how secure is Aramco’s stability anyhow, given anticarbon trends and geopolitical risks posed by the rise of Iran and the stubborn Houthis, who have been launching aggressive suicide drone attacks on the Kingdom. One over the weekend started a fire at Riyadh refinery.
And President Joe Biden hasn’t been particularly friendly with the House of Saud. While on the campaign trail last year Joe Biden referred to Saudi Arabia as a pariah state with “no redeeming social value.” And yet a month ago he decided against sanctions on the powerful Crown Prince Mohammed bin Salman for ordering the 2018 killing of dissident Saudi journalist Jamal Khashoggi. Ironically, Biden could end up doing the Saudis (and the rest of OPEC) a host of favors by keeping America’s frackers reined in by fears of new federal regulation. Last week the U.S. horizontal rig count rose by 11 according to Enverus, to 488 rigs, just half the drilling that was under way in late 2018.
Without a ramp in drilling and fracking, the U.S. is likely to lose its position as the world’s biggest oil producer. At 10.6 million bpd now (down from 12.2 million in 2019), U.S. production remains just ahead of Russia at 10.2 million and Saudi Aramco at 8.5 million bpd.