London, 01 April 2019 -- Moody's Investors Service ("Moody's") has today
assigned a first-time A1 long-term issuer rating to Saudi
Arabian Oil Company (Saudi Aramco) and a provisional (P) A1 rating to
Saudi Aramco's Global Medium Term Note (GMTN) programme.
The outlook is stable.
"Saudi Aramco has many characteristics of a Aaa-rated corporate,
with minimal debt relative to cash flows, large scale of production,
market leadership and access in Saudi Arabia to one of the world's
largest hydrocarbon reserves. These features position it favourably
against the strongest oil and gas companies that Moody's rates,"
said Rehan Akbar, a Vice President - Senior Credit Officer
at Moody's.
"The final rating is however constrained by the government of Saudi
Arabia's A1 rating because of the close interlinkages between the
sovereign and the company".
RATINGS RATIONALE
Saudi Aramco benefits from a very large operational scale, significant
downstream integration and strong financial flexibility given its low
cost structure and robust balance sheet. This provides considerable
credit resilience through oil price cycles. The company is the
world's largest oil supplier and has exclusive access to nearly
all of Saudi Arabia's vast hydrocarbon resources, which are
one of the world's largest proven oil and gas reserves.
The company's balance sheet leverage has been conservatively managed
with Moody's-adjusted debt/book capitalization of 14.7%
as of year-end 2018. This compares favourably against levels
of the highest rated industry peers such as Exxon Mobil Corporation (Aaa
stable) and Chevron Corporation (Aa2 positive) which both had debt/book
capitalization ratios of 18.4% as of year-end 2018.
Royal Dutch Shell Plc (Aa2 stable) and Total S.A. (Aa3 positive)
had ratios of 33.5% and 43.2% respectively
for the last twelve months ending 30 September 2018. Saudi Aramco
has a long-standing track record of maintaining minimal leverage
and high profitability, and as of year-end 2018, Moody's-adjusted
debt/EBITDA stood at 0.2x while EBITDA margin was 63.7%.
In 2018, the company produced 10.3 million bbl/day of crude
oil (including blended condensate) relative to its maximum sustainable
capacity of 12 million bbl/day. Considerations on crude production
volumes include supply cut commitments by the government of Saudi Arabia
(A1 stable; A1 foreign currency ceiling) with OPEC and non-OPEC
members in order to balance the oil market. About 38% of
the crude oil production in 2018 was consumed by Saudi Aramco's
downstream business. Investment in the downstream sector is a key
strategic focus for the company as it is a means to secure end markets
for its oil production and capture value across the hydrocarbon chain.
Moody's therefore anticipates that the company will continue to
heavily spend in the refining and petrochemical business.
The proposed acquisition of a 70% equity interest in Saudi Basic
Industries Corporation (SABIC, A1 stable) from the Public Investment
Fund (PIF), one of the government's sovereign wealth funds,
is an extension of Saudi Aramco's strategy to expand its footprint
in chemicals. On 27 March 2019, Saudi Aramco announced the
signing of a share purchase agreement to acquire the 70% stake
in SABIC for $69.1 billion. This acquisition will
strengthen the company's business profile given that downstream
assets typically provide countercyclical cash flow benefits. Saudi
Aramco's substantial cash flow generation capacity and financial
flexibility will enable the company to fund the SABIC acquisition without
the need to materially leverage-up its balance sheet even under
weak oil price scenarios. The cash consideration will be paid to
PIF in installments up until 2021, funded primarily through Saudi
Aramco's cash balances and operating cash flows and complemented
by some external debt.
Saudi Aramco has an extremely strong liquidity position. As of
year-end 2018, the company had $48.8 billion
of cash relative to $27 billion of reported group debt.
Of the $46.8 billion of group bank facilities, about
$25.5 billion remains available and includes $12.7
billion of undrawn revolving credit facilities. In 2018 when the
average Brent price was $71/bbl, the company reported cash
flow from operations (net of taxes and royalties) of $121 billion,
undertook $35.1 billion in capital spending and paid $58.2
billion in dividends. In comparison, the average Brent price
in 2017 was $54/bbl and led to reported cash flow from operations
of $89 billion, with $32.5 billion in capital
spending and $50.4 billion in dividend payments.
In Moody's view, credit linkages to the government of Saudi
Arabia are significant, and results in the decision to constrain
Saudi Aramco's rating to that of the government. The company
is wholly-owned by the state and is expected to remain largely
under government ownership even after any potential IPO in the future.
While there is a clear track record of Saudi Aramco having been run as
a commercially independent company, the government's budget
is highly reliant upon contributions from Saudi Aramco in the form of
royalties, taxes and dividends. Government expenditures in
return drive activity in the wider economy. The oil sector also
comprises a substantial portion of Saudi Arabia's GDP and dominates
its exports. The company's profitability is mainly driven
by its upstream operations, which are based domestically.
The combined impact of these characteristics causes Moody's to view
Saudi Aramco as being closely linked to the same credit strengths and
risks as the sovereign.
Given the government ownership and its strategic importance to Saudi Arabia,
Moody's has classified Saudi Aramco as a Government-Related
Issuer (GRI). Moody's GRI assumptions include (1) 'very
high' interdependence between the government and Saudi Aramco;
and (2) 'very high' likelihood of extraordinary support being
provided to the company from the government if ever required. The
company's A1 rating incorporates a baseline credit assessment (BCA)
- a measure of standalone credit quality - of a1 which is
in itself constrained by the sovereign rating because of the company's
close linkages with the government of Saudi Arabia. It is difficult
to decouple these linkages given that Saudi Arabia's A1 rating is
underpinned by the strength and contributions of Saudi Aramco.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that Saudi Aramco's
credit profile will remain robust despite the volatility of crude oil
prices. The interlinkages between Saudi Arabia and the company
imply that a change in rating outlook on the government of Saudi Arabia
would be mirrored on Saudi Aramco's rating outlook.
WHAT COULD CHANGE THE RATING UP/DOWN
Saudi Aramco's rating is constrained by the rating of the government
of Saudi Arabia given the broad credit linkages between the two.
Excluding credit linkage considerations with the sovereign, Moody's
sees the company's fundamental profile as being significantly stronger
than an A1 rating and therefore an upgrade of the sovereign rating would
likely lead to an upgrade of Saudi Aramco's rating if it maintains
its prudent financial policies.
Negative pressure on the sovereign rating will lead to negative pressure
on Saudi Aramco's rating. A downgrade of Saudi Aramco's
rating in the absence of rating pressure on the sovereign is highly unlikely
given Moody's current view of the fundamental strength of the company.
PRINCIPAL METHODOLOGY
The methodologies used in these ratings were Global Integrated Oil &
Gas Industry published in October 2016 and Government-Related Issuers
published in June 2018. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
Headquartered in Dhahran, Saudi Arabia, Saudi Arabian Oil
Company is the state-owned national oil company of the Kingdom
of Saudi Arabia and is the world's largest oil producer.
The company has exclusive rights - subject to limited exceptions
- to explore, develop and refine Saudi Arabia's hydrocarbon
resources.
Saudi Aramco's upstream assets are located in Saudi Arabia while
its downstream assets are located both in the Kingdom and overseas.
Saudi Aramco under its 60 year concession term has access to proven oil
and gas reserves of 256.9 billion barrel of oil equivalent (boe)
and its total hydrocarbon production in 2018 stood at 13.6 million
boe/day. The company had equity share refining capacity of 3.1
million bbl/day and equity share chemical production capacity of 16.8
million tonnes/year. This will increase to 3.7 million bbl/day
and 20.8 million tonnes/year respectively once both the Jazan and
PRefChem integrated refinery and petrochemical projects complete by the
end of 2019. In 2018, the company reported $355.9
billion in revenue and other income related to sales and $111.1
billion in net income.
The Local Market analyst for these ratings is Rehan Akbar, +971
(423) 795-65.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sven Reinke
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
David G. Staples
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
