Saudi Aramco: vast scale of NOCs diminishes supermajors to bit players

The Total Perspective Vortex, an invention of sci-fi writer Douglas Adams, tortured victims with their own insignificance. Saudi Aramco fulfils that function for oil supermajors. It has just announced quarterly net income of $48.4bn, more than double Exxon’s figure. The Saudi Arabian group is worth $2.4tn, six times the market capitalisation of the US company.

Hold those “oohs” and “aahs”. The comparison has implications beyond rubbernecking amazement. Saudi Aramco is the leading leviathan in a pod of national oil companies (NOCs), including PetroChina, Rosneft and Petrobras. High energy prices have strengthened the financial muscle they bestow on their controlling governments. The susceptibility of the latter to environmental lobbying is low.

Saudi Aramco has been talking up renewable energy plans, even so. These include ramping up blue hydrogen production. But the surging capital expenditure target of the state-controlled business, up by half from 2021 to between $40bn and $50bn, underscores its likely position as one of the last oil producers in the energy transition.

The group spends more than ever on hydrocarbons. The figure for upstream oil and gas output climbed 11 per cent year on year in the first half. Meanwhile, the sum of upstream capex of the world’s independent producers, including Chevron and Shell, will not exceed 2019 levels before at least 2025, says RBC.

High oil prices buoy Saudi Aramco’s profits less than at supermajors. The Saudi government extracts higher royalty rates from revenues as prices rise. The take jumps from 15 per cent to 40 per cent above $70 per barrel and doubles again when $100 is exceeded.

You could call it a windfall tax. The thinly traded shares lag accordingly. The free float of just over 5 per cent includes the Saudi sovereign wealth fund. But the valuation of more than $2tn, decried by Lex a few years ago, looks more believable now that oil is dear.

While Saudi Aramco trumpets its bounty of free cash flow — more than $65bn in the first half — a dividend yield of just 3.1 per cent looks skimpy compared with peers. Given the largesse, the group will probably have to lift its dividend, says Bernstein.

Most foreign investors will continue to steer clear of Riyadh-listed Saudi Aramco. Apple, valued at almost $2.8tn, will appeal more. But the profits of the group and other NOCs matter to the fate of nations and the planet. In comparison, the US device maker is a sideshow.

The Lex team is interested in hearing more from readers. Please tell us what you think of Saudi Aramco in the comments section below