Leverage at Upper End: Fitch projects that Saudi Aramco's leverage for 2020-2023 will remain on the upper end of our sensitivities for the current SCP of FFO net leverage of 1x, and that the company may need to take additional measures to bring gearing in line with its own targets (5%-15% through the cycle), such as disposals or dividend cuts.
The company's exceptionally high reserve life of over 50 years allows for flexibility around the timing and amount of capex without compromising production volumes, in turn allowing Saudi Aramco to free up additional liquidity without adversely affecting its credit profile, if needed.
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. We estimate Saudi Aramco's liquids production to fall about 7% yoy in 2020 before rebounding gradually in 2021-2022 but the company will benefit from stabilised oil prices. Saudi Aramco has revised down its capex budget to USD25 billion-USD30 billion in 2020, compared with USD33 billion in 2019; which is 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. Under our oil price assumptions this could result in Saudi Aramco's post-dividend FCF turning negative in 2020 and 2021 before broadly breaking even in 2022-2023. We assume that Saudi Aramco has the flexibility to reconsider its dividend commitment in case oil prices remain depressed for longer than we expect, or in case of other unfavourable developments.
SABIC Deal Completed: Saudi Aramco in June completed its acquisition of the 70% stake in SABIC held by the Saudi sovereign wealth fund, under a substantially revised instalment schedule. While the original instalment plan was set to conclude all payments by 2025, the revised schedule allows Saudi Aramco to stretch payments to 2028. We believe this revision has a positive impact on its liquidity position. We treat SABIC-related unpaid obligations, excluding loan charges, as debt. We view the deal as positive for Saudi Aramco's business profile. However, given Saudi Aramco's large scale earnings will continue to be dominated by upstream operations.
Strong Business Profile: Saudi Aramco's business profile is very strong. Its lifting costs (USD2.8/boe in 2019) and upstream capex (USD4.7/boe) are much lower than those of international integrated firms and some national oil companies - a significant advantage during volatile oil prices. Saudi Aramco's business profile also benefits from a very large scale of production and vast 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 is not planning to diversify into renewables on a large scale.
Robust Profitability: In 2019, Saudi Aramco's FFO per barrel of oil equivalent amounted to USD22/boe, lower than that of Shell (USD32/boe) and Total (USD30/boe), and comparable with that of some Russian peers (e.g. PJSC Lukoil - USD20/boe). In absolute terms, Saudi Aramco generated USD105 billion in FFO, well in excess of that generated by any other oil company globally.
Strong Links with Sovereign: Saudi Aramco's rating is constrained by that of Saudi Arabia in accordance with Fitch's both GRE and 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.
We assess status, ownership and control as well as support track record and expectations as 'Strong' given Saudi Aramco is majority-owned by the government of Saudi Arabia. While the company's robust financial position has not necessitated support from the government historically, we expect that support would be forthcoming if the need arises.
We view socio-political impact or financial implications of the company's default as 'Very Strong' due to Saudi Aramco's key role in the economy of Saudi Arabia as a key purveyor of feedstock to the country's power generation fleet, as well as supplying fuel and feedstock to the industrial sector and other key end-markets. Furthermore, we factor in Saudi Aramco's meaningful contributions to government revenues, and its status as a prominent issuer on the international capital markets; effectively serving as a proxy for the sovereign.
All the above resulted in an overall score of 50. This, along with Saudi Aramco's SCP, leads to its rating being constrained by the sovereign's. Derivation Summary 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. In 2019, its liquids production and its total hydrocarbon production averaged 11.2 million barrels of oil equivalent a day (mmboepd) and 13.2 mmboepd, respectively, well ahead of the upstream output of global and regional integrated producers, such as Abu Dhabi National Oil Company (ADNOC; AA/Stable), Royal Dutch Shell plc, Total SE and BP plc. Saudi Aramco's leverage will increase but should remain low by industry standards even following the acquisition of a 70% stake in SABIC. Key Assumptions - Brent crude oil price assumptions in line with Fitch's base-case price deck - 2020: USD41/bbl, 2021: USD45/bbl, 2022: USD50/bbl, 2023 and thereafter: USD53/bbl.
- Refining margins of USD2/bbl in 2020, reverting to USD5.5/bbl until 2023
- Upstream production ranging between 12 mmboepd and 13 mmboepd for the next four years
- Refining throughput of 3 million barrels per day for the next four years
- Annual dividend payout of USD75 billion
- Capex of USD25 billion to USD27.5 billion per annum for the next four years RATING SENSITIVITIES Rating sensitivities for Saudi Aramco
Developments That May, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- Positive rating action on Saudi Arabia
- An upward revision of the SCP is unlikely given inherent volatility of the oil and gas industry and Saudi Aramco's upstream production concentration in a single country
Developments That May, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- Negative rating action on Saudi Arabia
- 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 FCF or large acquisitions, which may be negative for the SCP but not necessarily for the IDR
- Accelerated energy transition leading to lower global oil demand may be negative for the SCP but not necessarily for the IDR
Rating sensitivities for Saudi Arabia (See Fitch Affirms Saudi Arabia at 'A'; Outlook Stable - published 9 April 2020)
The following factors could, individually or collectively, trigger positive rating action/upgrade:
- Fiscal consolidation or an extended rise in oil revenue that generates a sustainable fiscal surplus and restores the government's net creditor position
- A sustained easing in geopolitical tensions in the Gulf region
The following factors could, individually or collectively, trigger negative rating action/downgrade:
- Further deterioration of the government or broader public sector balance sheet
- Continued deterioration in Saudi Arabia's net external creditor position
- A major escalation of geopolitical tensions that affects key economic infrastructure and activities 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-2019 Saudi Aramco's cash and cash equivalents (around USD59.5 billion) and available credit lines (USD10 billion) were more than sufficient to cover one-year debt maturities (around USD5 billion) and negative FCF, including SABIC-related payments, resulting in liquidity scores in excess of 1x. Our assessment of Saudi Aramco's financial flexibility also incorporates the company's very strong pre-dividend FCF, low debt levels, proven access to international debt markets and strong links with the sovereign. Summary of Financial Adjustments Fitch reclassifies lease-related expenses as operating expenses, and excludes lease-related liabilities from debt. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING 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 that of Saudi Arabia. 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 - can be found here https://app.fitchconnect.com/entity/GRP_81688867. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Saudi Arabian Oil Company; Long Term Issuer Default Rating; Affirmed; A; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1+ ----senior unsecured; Long Term Rating; Affirmed; A
Contacts: Primary Rating Analyst Dmitry Marinchenko, CFA, ACCA Senior Director +44 20 3530 1056 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN
Secondary Rating Analyst Gabor Petroczi, Director +49 69 768076 122
Committee Chairperson Angelina Valavina, Senior Director +44 20 3530 1314
Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: email@example.com
Additional information is available on www.fitchratings.com
Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Government-Related Entities Rating Criteria (pub. 13 Nov 2019) (https://www.fitchratings.com/site/re/10099139) Parent and Subsidiary Linkage Rating Criteria (pub. 26 Aug 2020) (https://www.fitchratings.com/site/re/10133830) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 26 Jun 2020) (https://www.fitchratings.com/site/re/10125796)
Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1 (https://www.fitchratings.com/site/re/973270))
Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10136474) Solicitation Status (https://www.fitchratings.com/site/pr/10136474#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10136474#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10136474#endorsement-policy)
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