Saudi Aramco’s Financial Analysis Report – A Case Study

1.0 Executive Summary

This case study will cover the introduction and financial trends of Saudi Aramco, which describe the company’s financial position. It also highlights the impact of the global crisis and how Saudi Aramco managed to deal with it. Moreover, it covers the crucial ratios for a financial analysis report, which indicates the company’s financial health. This report also focuses on the product portfolio and the efficiency of its operations by evaluating Asset management and other relevant financial ratios. 

The report’s objectives are mentioned below:

•   To evaluate the company’s earning potential and profitability trends.
•   To evaluate the company’s product portfolio and operational efficiency.
•   To evaluate the firm’s future trends.

2.0 Introduction

Saudi Aramco, officially the Saudi Arabian Oil Company or simply Aramco, is a Saudi Arabian public petroleum and natural gas company based in Dhahran. The corporation was founded in 1933, and drilling operations commenced in 1938. 

It is responsible for the exploration, production, and processing of crude oil and natural gas and the distribution of petroleum products and natural gas. It also refines and fractionates natural gas. A network of terminals, bulk plants, air refueling locations, and pipelines supports Saudi Aramco’s operations. In the Kingdom of Saudi Arabia, the firm also manages power plants and the transmission and distribution systems that go along with them. The corporation has joint ventures and subsidiaries in the Americas, Europe, and other locations.

Aramco has employed renewable energy across all its facilities to generate oil and gas and store hydrocarbon resources for future, more lucrative uses.

In the 2nd quarter of 2022, Aramco recently completed its historic $69.1 billion purchase of a 70% interest in SABIC (Saudi Basic Industries Corporation). It is also referred to as SABIC, a chemical producer. Saudi Aramco holds 70% of the outstanding shares of SABIC. This elevated Aramco to a significant position among the world’s top producers of petrochemicals. It has 43 piers and three multipurpose terminals for accommodating mega-ships. 

3.0 Product Portfolio

3.1 Oil

As the world’s largest crude oil producer by volume, Aramco intends to keep that position. Due to its reserves, operating capabilities, and excess demand, it can increase production in response to demand.

3.2 Oil Terminal

All of Saudi’s critical crude oil grades load from Saudi Aramco along with condensate and products. The port comprises three terminals: Ras Tanura terminal, Ju’aymah crude terminal, and Ju’aymah LPG export terminal.

3.3 Production

Saudi Aramco has the world’s second-largest proven crude oil reserves, at more than 270 billion barrels (43 billion cubic meters), and the most significant daily oil production of all oil-producing companies.

3.4 Gas

To fulfill the massive and expanding domestic demand for low-cost, cleaner energy, Aramco wants to expand its gas business substantially. This includes exploring unconventional gas resources, increasing productivity, and investing in additional infrastructure.

3.5 Gas Stations

More than 11,000 retail fuel stations are owned by Saudi Aramco-related companies worldwide, including China, South Korea, Japan, and the United States.

3.2: Production

Saudi Arabia, the world’s seventh-largest natural gas market, now receives all of its natural gas from Saudi Aramco. It’s natural gas is a key component in supplying the nation’s expanding energy needs for steel, aluminum, and water desalination sectors. 

Saudi Arabia has proven natural gas reserves of 237.4 trillion standard cubic feet in December 2019. Through the same year, Saudi Aramco produced 9.0 billion (Standard Cubic Feet/Day) scfd of natural gas from its portfolio of 510 reservoirs within 138 fields.

4.0 Company Profile

• The most integrated oil and gas business in the world, Saudi Aramco maintains the unique hydrocarbon reserve base of the Kingdom while maximizing production and long-term profitability. Additionally, it runs a globally integrated downstream company. The corporation has its headquarters in Dhahran and employs more than 70,000 people in the Kingdom and abroad.
• Despite being owned mainly by the government, it raised $29.4 billion in an IPO in 2019 and a greenshoe option in 2020.
• Because of the company’s credit ties to the Saudi government, Moody gave it an A1 rating.
• Saudi Aramco continues to outperform its rivals despite reporting decreased net income for the 2020 fiscal year due to the global COVID-19 pandemic.
• About one out of every ten barrels of crude oil produced globally in 2021 was produced by the Company.
• The proved liquids reserves of the company were more than five times greater than the proved liquids reserves of the five primary IOCs combined (BP, Chevron, ExxonMobil, Royal Dutch Shell, Total SA).
• The Company’s daily net refining capacity was 4.0 million barrels, while its daily gross refining capacity was 6.8 million in 2021.
• In 2021, Aramco had a net profit margin of 26.3%, whereas all five of the world’s largest oil firms had net losses or margins in the single digits.
• Saudi Aramco holds the world’s lowest oil and gas production costs.
• In Q1 2022, the company’s net profit increased to USD 148 billion from USD 81.4 billion in Q1 2021.
• With the addition of our Jazan Refinery Complex, Aramco has five wholly-owned refineries within the Kingdom, three of which were built specifically to supply transportation and utility fuels for the domestic marketplace.

5.0 Impact Of Global Crisis 

• Russia’s invasion of Ukraine exacerbated last year’s energy crisis by driving up oil and gas prices, which then increased consumer and business costs.
• Hundreds of billions of euros have been spent on tax breaks and subsidies by European governments to soften the damage.
• The EU revealed proposals last week to earn approximately €140 billion (£121 billion) by imposing windfall taxes on energy companies’ “abnormally high profits” and redistributing the money to people and businesses dealing with skyrocketing bills. In the UK, the energy earnings levy on North Sea oil and gas operators was unveiled in May by the former chancellor Rishi Sunak.
• Last month, Saudi Aramco underscored the vast profits made by gas and oil-rich nations during the energy crisis by revealing profits in the three months to the end of June up 90% to $48bn (£40bn). The figure is considered one of the largest quarterly profits in corporate history.
• The world is facing a major oil supply crunch as most companies are afraid to invest in the sector as they face green energy pressures, the head of Saudi Aramco told Reuters, adding it cannot expand production capacity any faster than promised.
• The world is running with less than 2% of spare capacity. Before COVID, the aviation industry consumed 2.5 million BPD ( Barrels per day)  more than today. If the aviation industry picks up speed, Saudi Aramco is going to have a major problem.
•  The main cause of Oil and Gas price fluctuations with any commodity, stock, or bond is the laws of supply and demand that cause oil prices to change. When supply exceeds demand, prices fall; the inverse is true when demand outpaces supply.

 

6.0 Covid-19 Effect 

• As the effects of Covid-19 started to be felt in the market, Aramco’s upstream earnings before tax decreased by 70% in Q2 2020 compared to Q2 2019. But despite difficulties, Aramco managed to retain a profit during that time, unlike many other significant oil and gas firms.
• Aramco decided to lower its capital budget for the year by more than $12 billion in March following the viral outbreak. The new budget will be between $25 and $30 billion. Major growth projects have therefore had to be delayed by the company.
• In December 2019, Aramco went public, making it the most valuable company in the world. A few months later, the Covid-19 pandemic struck and damaged the world’s economies. However, Aramco decided to increase its dividend payment to $18.75 billion to maintain investor confidence and boost the government’s fiscal budget because they had previously forecasted a $60-70 per barrel on which their budget is based. 
• In Q2, the company saw a significant net income decline as global demand and oil prices fell. Aramco’s stock prices were relatively stable compared to other significant oil and gas companies, partly because Aramco gave bonus shares to retail investors who held their shares throughout this time.

7.0 Financial Performance

7.1 Cost & Revenue

• According to the business’s financial analysis report released in 2nd quarter of 2022, the net income of Saudi Arabia’s state-backed oil corporation Aramco climbed by more than 90% during the second quarter of 2022 due to higher prices and quantities sales of hydrocarbons, refined products, and chemicals.
• According to the oil company, it made 48.4 billion Saudi riyals ($181.6 billion) between April and June of this year as opposed to 95.5 billion ($25.5 billion) during the same period in 2021. 
• The largest oil business in the world attributed the record income growth to rising crude oil prices, sold volumes, and refining margin. The Company’s daily net refining capacity was 4.0 million barrels, while its daily gross refining capacity was 6.8 million barrels.
• Saudi Aramco holds the world’s lowest oil and gas production costs. Compared to a net profit of USD 81.4 billion in Q1 2021, the company’s first-quarter 2022 net profit was USD 148 billion.

7.2 Financial Trends

To be more precise, the financial ratio is the instrument that discerns and identifies the connection between two or more variables. Additionally, these ratios are vital for creating a financial analysis report.

Net profit In comparison to the same period in 2021, when net income was SAR 290,998 ($77,600), the first nine months of 2022 saw a net gain of SAR 488,784 ($130,342). The increase is mainly due to increasing crude oil prices, sales volumes, and refining margins.

7.3: Revenue Trends  

	2021	2020	2019	2018	2017
EBITDA Growth	86.44%	-36.58%	-13.66%	35.38%	–

According to the above information, EBITDA growth was highest in 2021, but as compared to the previous years, the rate was -36.58% due to the global pandemic, which affected the EBITDA of the industry. 

All the values in the following graphs are in millions.

We can see a huge revenue and gross profit decrease in 2020 because of the Covid-19 outbreak. But it has managed to increase in 2021. Due to covid-19 in 2020, we have seen an immense decrease in EBITDA growth as well

7.2(2) Balance Sheet Trends

From this table of the financial analysis report, from the past five years total assets, assets are seen increasing yearly, with the highest total assets in 2021. The Company bought lands, machinery, equipment, and other property and plants in 2021.

You can also see the change in liabilities over the years. But there is little difference in 2020 and 2021 because the short debt decreased in 2021. And long-term debt is almost the same in both years.

Liquidity Ratios 

Liquidity ratios are financial ratios that measure a company’s capacity to pay off short-term loans.

Liquidity Ratio
		2017	2018	2019	2020	2021
Current Ratio	Current Assets/Current Liabilities	0.82	0.76	1.89	1.64	1.67
Quick Ratio	(Current Assets – Inventory)/Current Liabilities	0.82	0.76	1.69	1.42	1.46
Cash Ratio	Cash/Current Liabilities	0.27	0.19	0.82	0.85	0.83

The highest ratio, 1.9 current ratios, was noted in the year 2019. The firm has enough cash and cash equivalents to pay its short-term debt, shown by the highest ratio result of 1.7 in 2019. The current ratio is increasing because short-term debt is decreasing. The quick ratio is increasing because we have more current assets in the preceding years. Also, the cash ratio is increasing because cash in hand is increasing.

7.2(3) Cash Flow Trends   

Financial Leverage Ratio 

The equity or debt ratio is the common name for the financial ratio. The ratio is used to assess ARAMCO’s equity in its financial statements by looking at the total amount of debt held by the company. 

	Formula	2017	2018	2019	2020	2021
Total debt ratio	(Total Assets – Total Equity)/Total Assets	0.251	0.24	0.29	0.43	0.42
Long-term debt ratio	Long-term debt/(Total debt + total equity)	0.11	0.099	0.16	0.29	0.27
Times interest earned	EBIT/Interest	278.36	269.67	110.64	35.26	51.62
Cash coverage	(EBIT + depreciation)/Interest	296.1	283.6	118.98	42.47	57.66

The company is better able to fund its assets when the total debt-to-equity ratio is higher than one. The data from our financial analysis shows that the overall debt ratio is low and has improved slightly in recent years, such as 2020 and 2021, compared to earlier years.

Ratios indicate that the company is in a healthier long-term debt leverage scenario. All of the ratios are less than 0.5. If the ratio is less than 0.5, most of the assets are financed through equity.

8.0 Asset Management

A management performance evaluation is based on efficiency and effectiveness. The asset management ratio measures how successfully and efficiently ARAMCO manages its assets to generate revenue. We also use it to evaluate the organization’s health. The efficiency ratio and turnover ratio are other names for asset management ratios. A company’s operational capital will occasionally be substantial if it has made a considerable investment in its assets. Since a ratio greater than one implies that the company’s sales are more than its total assets, a high ratio is a positive sign for the business. We looked into the asset management ratio for the business.

Asset Management Ratios
	Formula	2017	2018	2019	2020	2021
Inventory turnover	COGS/Inventory	20.341	22.034	11.88	8.265	3.29
Day sales in inventory	365/Inventory turnover	17.944	16.57	30.7	44.165	110.63
Receivable turnover	Sales/Accounts Receivable	11.401	14.23	13.224	10.121	2.79
Days sales in receivables	365/Receivables turnover	33.290	25.62	26.37	44.548	65.32
Fixed assets turnover	Sales/Net Fixed Assets	1.319	1.53	1.26	0.713	0.285
Total assets turnover	Sales/Total Assets	0.899	0.99	0.83	0.450	0.171

According to this table, the company is using its assets in the generation of revenues effectively and efficiently. When the ratio is greater than that, the company is operating successfully. Two-quarters of the current year’s data are presented. As a result, the financial analysis report indicates a good performance for the business as a whole.

9.0 Profitability Ratio

Profitability ratios measure an entity’s ability to create revenue based on costs, assets, and equity. Further, we acquire this data at a specific point in time. Here, we have examined ARAMCO’s profitability ratios.

Profitability Ratios
	Formula	2017	2018	2019	2020	2021
Profit margin	Net Income/ Sales	0.28	0.031	0.27	0.21	0.27
Return on assets (ROA)	Net income/Total assets	0.26	0.031	0.222	0.096	0.047
Return on equity (ROE)	Net income/Total equity	0.345	0.041	0.316	0.167	0.083

The return on assets of a company determines how much money it can make from its assets. It evaluates how effectively the business generates income from its assets. The firm is doing well if the ROA is more than 5%. The company has improved its performance by keeping its ROA over 5% in recent years. In addition, the Return on Equity is a statistic used to evaluate ARAMCO’s profitability in relation to the company’s equity. 15% to 29% of return on equity is considered respectable. The aforementioned tables show that ARAMCO performed better in 2019 by remaining within the range.

10.0 Market Value Measures

These metrics are used to determine market cap. It is determined by multiplying the ARAMCO common shares by the company’s share price. We have identified the market value measures of the company, which are given below:

Market value measures
	Formula	2017	2018	2019	2020	2021
Earnings per share	Net income/number of shares outstanding	3.32	2.5	0.44	0.25	1.55
PE Ratio	Price per share/EPS	2.68	4	21.53	38.24	6.45

11.0 Conclusion

Due to the global pandemic, the global oil and gas demand took a huge hit, and the company was unable to gain targeted profits. However, an increasing trend has been seen based on the recovery in the Year 2021. This suggests that the company has a high potential to increase its market share and continue its profitability run.  

Saudi Aramco has some amazing opportunities in the future to maintain its top position among its competitors. In the next ten years, the signing of 59 corporate procurement agreements (CPAs) with 51 domestic and international manufacturers has the potential to generate 5,000 new jobs in the Kingdom of Saudi Arabia. 

The $11 billion deals are anticipated to strengthen Aramco’s reliable supply chain and establish facilities for manufacturing materials in the Kingdom. In addition, according to the company’s plan to maximize the value chain from oil to chemicals, Aramco is making its largest-ever investment in South Korea to build one of the giant refinery-integrated petrochemical steam crackers. This investment is being made through its S-OIL affiliate and holds great potential for the company.