world’s premier company · the biggest advantage aramco has compared to its competitors is the...

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Saleh Altwayan Riyad Capital is licensed by the Saudi Arabia

[email protected] Capital Market Authority (No. 07070-37)

+966-11-203-6815

World’s Premier Company

The highly anticipated IPO of the Saudi Arabian Oil Company (ARAMCO) has made its

debut on Tadawul as the government floated 1.5% of its stake in the local market.

Aramco is the world’s leading Oil & Gas Company and holds a significant market share

of global crude oil production, which averaged 12.9% over the past 10 years. Most of

the company’s energy exploration and production are in-Kingdom and its upstream

segment, primarily crude oil, dominates revenues. However, Aramco has set its

ambitions on expanding its upstream and downstream footprint globally. We believe,

the Company possess several distinctive features that sets it apart from its key

competitors, the top five international oil companies (BP, Shell, Exxon Mobil, Total,

Chevron). We initiate coverage with a Neutral rating and target price of SAR 37.00.

More than just oil

In its efforts of capturing value across the hydrocarbon value chain, Aramco is

focused on increasing its non-oil upstream and downstream capacities. Gas

processing capacity expanded significantly in tandem with the rise in local demand

and projected future demand. Further expansions are planned in the next few years

and the majority of Aramco’s exploration activities are currently directed towards

natural gas. Downstream activities also witnessed substantial growth as the

company collaborated with several world-class players and conducted multiple

acquisitions in their refining and petrochemical activities. The most notable is the

recent acquisition of PIF’s 70% stake in SABIC, which represents a significant

addition to the Company’s downstream activities, particularly in its chemicals

business.

Unique competitive advantage

The biggest advantage Aramco has compared to its competitors is the exclusive

access to the Kingdom’s hydrocarbon reserves, one of the largest in the world, and

the exclusive right to market and distribute them. Upstream lifting costs are among

the lowest in the world due to the unique nature of the Kingdom’s geological

formations and favorable onshore and offshore environments in which its reservoirs

are located. The Company enjoys oil equivalent reserves sufficient for proven

reserves life of 52 years, significantly longer than any of the top IOCs, and a long

concession term of 40 years (expiring 2057), extendable by 20 years based on certain

conditions commensurate with current operating practices.

Unrivaled financial efficacy

As shown below, the Company has better operating metrics such as Operating Cash

Flows (OCF), FCF, EBIT, EBITDA and ROACE than each of the top five IOCs. Aramco’s

gearing ratio, which is the ratio of net debt to net debt plus total equity, is also far

below each of the five top IOCs. The Company intends to maintain its gearing ratio

within its targeted range of 5% to 15%.

Expected Total Return

Price as on Jan-21, 2020 SAR 34.55

Upside to Target Price 7.1%

Expected Dividend Yield 4.6%

Expected Total Return 11.7%

Market Data

52 Week H/L SAR 34.00/38.70

Market Capitalization SAR 6,920 bln

Shares Outstanding 200 bln

12-Month ADTV (mln) 46.50

Bloomberg Code ARAMCO AB

Key Offering Facts

Investor Category & Allocation

Tranches % Shares

Institutional Subscribers 1.0 2 bln

Retail Investors 0.5 1 bln

IPO Retail Incentive - Bonus Shares

Each eligible retail bonus investor who

continuously and uninterruptedly holds offer

shares allocated to individual investors for 180

days will be entitled to receive one bonus share

for every 10 allocated offer shares so held, up to

a maximum of 100 bonus shares.

Dividend Prioritisation

For the years 2020 to 2024, if annual dividends

declared would have been less than SAR 1.40

per share, dividends to non-Government

shareholders are intended to be prioritised so

that they receive their pro-rata share of a SAR

1.40 per share equivalent dividend.

Shareholding

Saudi Government

98.21%

SAUDI ARABIAN OIL COMPANY (ARAMCO) Initiation of Coverage

Rating Neutral

12- Month Target Price SAR 37.00

January 22, 2020

Table 1: Key Financial Figures (2018)

ARAMCO (bln) Top 5 IOCs (bln)

Operating cash flow $121 $23-$53

Free Cash Flow $85.8 $6-$30

EBIT $212.8 $19-$39

EBITDA $223.8 $34-$61

ROACE 41% 8%

Gearing* 2.40% 12%-31%

Source: Company reports

* As of 30 June 2019

mailto:[email protected]

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SAUDI ARABIAN OIL COMPANY (ARAMCO)

Initiation of Coverage

Company Origin

Aramco’s roots can be traced back to 1933 when the government of Saudi Arabia

granted a concession to Standard Oil Co. of California (Socal), the predecessor of

Chevron, to explore oil within the Kingdom’s borders. The concession was managed

by SoCal’s subsidiary, The California Arabian Standard Oil Company (CASOC), which

began commercial operation in 1938. CASOC was renamed Arabian American Oil

Company (ARAMCO) in 1944 and the company continued to grow to eventually

become the world’s leading oil producer in terms of volume produced in a single year

by 1976. Between 1980 and 1981, the Government increased its participation

interest in the company’s crude oil concession rights, production and facilities to

100%. Afterwards, the company focused on establishing refining and marketing joint

ventures in strategic markets around the globe in order to further expand its market

and product offerings.

Hydrocarbon Resources

Saudi Arabia boasts one of the largest hydrocarbon reserves in the world, ranking 2nd

in crude oil reserve and 6th in natural gas reserves. As a result, Aramco’s reserves far

exceed those of the top five IOCs.

As compared to the top five IOCs, where their production is more geographically

diverse, Aramco’s oil and gas production is concentrated in a specific area. The

Company’s principal fields are located in Saudi Arabia and in close proximity to each

other within the Central and Eastern Provinces of the Kingdom.

Aramco’s oil equivalent reserves are sufficient for proved reserves life of 52 years,

much longer than the top five IOCs, which range between 9-17 years. This is not only

due to Aramco’s large reserves but also due to its adherence to the Kingdom’s

hydrocarbon law, which mandates that the Company’s hydrocarbon operations

promote long-term productivity of the Kingdom’s reservoirs and support the

prudent stewardship of its hydrocarbon resources. In accordance with the

requirements of the Hydrocarbons Law, the company maintains a Maximum

Sustainable Capacity (MSC), which refers to the average maximum number of barrels

per day of crude oil that can be produced for one year. The MSC is currently 12

mmbpd.

Table 2: Hydrocarbon Reserves

Crude Oil Condensate NGLs Combined

(mmbbl) (mmbbl) (bscf) (mmboe) (mmbbl) (mmboe)

Company Reserves 198,194 3,191 185,726 30,120 25,385 256,890

In-Kingdom Reserves 257,270 4,257 233,766 38,519 36,144 336,190


Natural Gas

Exhibit 1:Oil and Gas Field Locations


Oil field Gas field Oil & Gas pipelines

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Aramco sells five grade of crude oil and classifies grades of Arabian Light, Extra Light

and Super Light as premium grade because of their high API gravity and low sulfur

content. Crude oil with high API gravity is more valuable because it allows refineries

to produce a greater percentage of high-margin products from the oil than those

with lower API gravities. Crude oil with low Sulphur content is more valuable because

Sulphur must be removed prior to crude oil being refined into other products.

Roughly, half of Aramco’s crude oil reserves are classified as premium grade.

Table 3: Oil Grades Offered by Aramco

% of Crude Oil Reserves (U.S.$/bbl)*

Arab Heavy 34.9% 64.6

Arab Medium 17.7% 66.8

Arab Light 34.3% 68.4

Arab Extra Light 12.3% 70.5

Arab Super Light 0.8% 73.2

Source: Company reports, Bloomberg

* As of 14 Jan 2020

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Operating Segments

Aramco’s business can be divided into two segments: Upstream and Downstream.

The upstream business is comprised of liquids and gas while their downstream

business is comprised mainly of refining and chemical products.

Upstream:

Liquids

Aramco’s liquid production includes crude oil, condenstate, propane and butane.

Crude oil is the largest component of liquid production as it accounted for 89.3%,

89.0% and 88.7% of total production in 2016, 2017 and 2018, producing 10,561

mbpd, 10,080 mbpd and 10,315 mbpd, respectively. International deliveries

constitute roughly two third of deliveries, with Asia being the top destination, while

domestic deliveries are largely for affiliated refineries as shown below.

The bulk of Aramco’s international crude oil deliveries are for third parties as

opposed to domestic deliveries, where crude oil deliveries are mostly for affiliated

refineries as shown below.

Propane and Butane production constituted 7.2%, 7.4% and 7.7% of liquid

production in 2016, 2017 and 2018. Propane production is larger than butane and is

mostly sold domestically while butane deliveries are split roughly equally between

domestic and international deliveries as shown below.

Table 4:Crude Oil Delivery Destination Breakdown (mbpd)


5,170

1,176871

246

1,793

498739

5,073

1,005779

243

1,902

459704

5,211

1,013864

240

1,860

410707

0

1,000

2,000

3,000

4,000

5,000

6,000

Asia (ex-Kingdom) North America Europe Other Affiliated Refineries Local Wholly owned

refineries

International Domestic

2016 2017 2018

Table 5: Crude Oil Deliveries Based on Party and Destination (2018)


58%

13%

4%

25%

International (Third Party)

International (Affiliated)

Domestic( Third Party)

Domestic (Affiliated)

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Gas

Aramco’s gas production is comprised of Natural gas (methane) and Ethane. The

Company is the exclusive supplier of natural gas and all natural gas produced is sold

in-Kingdom. Due to the company’s own use of Natural gas, deliveries are noticeably

less than production.

Table 6: LPG Production and Delivery Destination (mbpd)


313

541

151 149 142

358

314

521

145128

146

375

328

565

151 142 157

385

0

100

200

300

400

500

600

Butane Propane Butane Propane Butane Propane

Production International Domestic

2016 2017 2018

Table 7: Natural Gas Production and Delivery Destination (mmscfd)


8,280

920

6,871

913

8,733

936

7,212

950

8,856

993

7,216

1,009

0

2,000

4,000

6,000

8,000

10,000

Natural gas Ethane Natural gas Ethane

Production Domestic

2016 2017 2018

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Downstream

Refining

The Company operates its refining business through its wholly owned operations

and affiliated refineries in association with renowned global industry partners.

Refining products are comprised of Diesel, Gasoline, Jet fuel/kerosene, Fuel Oil and

Others. The following table sets forth the refining capacity of the Company as at

2018.

Aramco’s production volume for its refined products on a consolidated basis is as

follows.

Exhibit 2: Aramco's Share of Production in Refined Products in 2018 (mbpd)


Table 8: Aramco's Refining Capacity (mbpd)

In-Kingdom wholly owned Capacity Interest Effective Capacity

Ras Tanura 550 100% 550

Yanbu 250 100% 250

Riyadh 130 100% 130

In-Kingdom JVs and JOs

SATORP 400 62.5% 250

YASREF 400 62.5% 250

SAMREF 400 50.0% 200

SASREF* 305 50.0% 153

Petro Rabigh 400 37.5% 150

International

Motiva (U.S) 635 100% 635

S-Oil (S. korea) 669 61.6% 412

FREP (China) 280 25.0% 70

Showa Shell (Japan) 445 15.1% 67

Total 4,864 64% 3,117


* On 18 September 2019, the Company acquired Shell’s 50% interest in SASREF and subsequently changed

the name of SASREF to Saudi Aramco Jubail Refinery Company

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Chemicals

The core of the Company’s petrochemical manufacturing is conducted through its

affiliates located in the Kingdom, China, Japan, South Korea and the Netherlands

with international industry players. The Company’s chemicals facilities are as below.

The following table sets forth the Company’s gross and net capacity for each type of

its commodity petrochemicals, principal polyolefins, synthetic rubber and

elastomers and other chemicals as at 2018.

The acquisition of PIF’s 70% equity interest in SABIC, which is expected to close in

1H2020, represents a significant addition to Aramco’s petrochemical portfolio.

Upon closing of the SABIC transaction, the Company expects to have the largest net

production capacity for ethylene and be amongst the top four companies by net

production capacity for polyethylene, monoethylene glycol and polypropylene.

Table 11: SABIC's Net Production Capacity of Key Products (KTA)

Net Production Capacity

Ethylene 11,392

Polyethylene 5,910

Monoethylene glycol 3,812

Polypropylene 2,804

Total 23,918


Table 10: Gross and Net production Capacity of Chemicals (KTA)

Commodity petrochemicals: Gross Capacity Net Capacity

Ethylene 4,299 1,912

Propylene 3,957 1,970

Butadiene 168 42

Paraxylene 4,700 2,275

Benzene 2,376 1,122

Other aromatics 2,533 1,219

Principal polyolefins:

Polyethylene 2,985 1,309

Polypropylene 1,773 681

Synthetic rubber and elastomers:

Synthetic rubber and elastomers 2,039 1,915

Other chemicals (including polyurethanes)

Intermediates 1,491 765

Derivatives 6,822 3,477

Total 33,143 16,687


Table 9: Chemicals Operations

Domestic Operations Interest Products

Sadara 65%Olefins, polyethylene, ethylene oxide, butyl glycol, amines, propylene oxide,

propylene glycol, polyols, isocyanates

SATORP 63% Benzene, Paraxylene, Propylene

YASREF 63% Benzene

SASREF 50% Benzene

Petro Rabigh 38%Ethylene, Propylene, Polyethylene, Polypropylene, Propylene Oxide, Paraxylene,

Benzene, Monoethylene glycol, Phenol/acetone, Poly-methylmethacrylate, Nylon

International Operations

S-Oil 62% Paraxylene, Benzene, Toluene, Xylene, Propylene, Polypropylene, Propylene

PRefChem 50%Propylene, Ethylene, Benzene, MTBE, Butadiene, Polyethylene, Polypropylene,

Ethylene glycol

FREP 25%Olefins, Butadiene, Polyethylene, Polypropylene, Glycols, Benzene, Paraxylene, Mixed

C4s

ARLANXEO 100% Synthetic rubber and elastomers


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Industry Outlook

Crude oil Demand

Oil demand is mainly driven by real global GDP growth, which is currently driven by

non-OECD countries, in particular non-OECD Asia Pacific. Although global crude oil

demand growth generally tracks global GDP growth trends, it has recently grown at

a lower rate due to several factors, including an increasing use of alternative energy

sources, more efficient use of oil and the electrification of vehicles. Demand for oil is

influenced by its use for energy as it is the world’s leading energy source, accounting

for 32% of the global energy demand in 2017. Through 2030, oil is expected to remain

the primary energy source despite anticipated increases in energy efficiency,

increased use of natural gas and renewable energy sources, such as solar and wind

power, and the introduction of new technologies, such as electric vehicles.

Natural Gas Demand

In-Kingdom natural gas demand is expected to grow at a CAGR of 3.6%, compared

to global demand for gas, which is likely to grow at a CAGR of 1.7% during the same

period. Future in-Kingdom demand for natural gas would be driven primarily by

expected growth in demand for power generation and the refining and industrial

sectors, including chemical feedstock. The Kingdom would rely more on natural gas

for power generation, which in turn is expected to be the primary driver of gas

demand in the Kingdom through 2030. Although most of the additional natural gas

supply is likely to be used to meet new power demand, some natural gas volumes will

displace existing oil-based power generation. Overall, these steps may lead to a re-

allocation of the use of crude oil from feedstock for power generation to being

available for export. The refining and industrial sectors are expected to be secondary

drivers of natural gas demand in the Kingdom through 2030 with demand expected

to grow at a CAGR of 9.6% and 4.6%, respectively, from 2017 to 2030.

Refined Products Demand

Global demand for refined products is likely to increase at a CAGR of 0.8% from 2017

to 2030 driven by continuing demand from Africa, the Middle East and Asia Pacific,

which are expected to grow at CAGRs of 2.4%, 1.6% and 1.7%, respectively. Over

that period, Asia Pacific’s share of global demand for refined products can increase

from 37.2% to 41.1%. Demand for refined products in North America from 2017 to

2030 is expected to decrease at a CAGR of 0.6%, and to remain flat in Europe. The

regional changes in refined product demand have led to a geographical shift in

refining operations, with new, large and increasingly complex refineries opening in

Asia Pacific and Middle East and aging refineries closing in OECD countries,

particularly in Europe, as they become uneconomical and inefficient to operate.

These new, larger and increasingly complex refineries have superior crude diet

flexibility and greater efficiency.

Exhibit 3: Real GDP Growth (YoY%)

Source: OECD

0%

2%

4%

6%

8%

10%

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

China OECD World

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Chemicals Demand

Demand for chemicals is expected to increase at a greater rate than the increase in

demand for crude oil and refined products. Global demand for ethylene and

propylene, which are key base products for chemicals, are expected to increase at an

average rate of 3.5% and 3.9% respectively, from 2018 to 2030. High Density

Polyethylene and Polypropylene are expected to increase at an average rate of 4.5%

and 3.9% respectively, from 2018 to 2030.

Exhibit 4: Chemicals Demand Growth (YoY%)

Source: Bloomberg

1%

2%

3%

4%

5%

6%

2014 2016 2018 2020 2022 2024 2026 2028 2030

Ethylene Propylene High Density Poly Ethylene PolyPropylene

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Strategy

Integrating upstream and downstream segments

Aramco is focused on increasing the strategic integration of its upstream and

downstream businesses, creating an integrated global downstream refining and

chemicals business and enhancing its domestic and global marketing businesses.

The integration of the Company’s upstream and downstream segments allows the

Company to secure crude oil demand by selling to its owned and affiliated domestic

and international refineries. Integrating upstream and downstream segments will

facilitate the placement of the Company’s crude oil in larger offtake volumes which

will capture additional value across the hydrocarbon chain, expand its sources of

earnings and provide resilience to market volatility. Aramco plans to enter into new

downstream ventures and increase ownership and control of its current ventures.

SASREF and Motiva are two recent examples of downstream assets that were held

as joint ventures that have been fully acquired. The acquisition of PIF’s 70% stake in

SABIC is also another recent example of Aramco’s determination in expanding its

downstream business, particularly chemicals, as SABIC is the fourth largest

petrochemicals company in terms of revenue.

Expanding gas activities

The Company plans to expand its gas business to meet large and growing domestic

demand for low-cost clean energy and swing production capacity in the peak

summer season by increasing production and investing in additional infrastructure.

This demand is driven by power generation, water desalination, petrochemical

production and other industrial consumption in the Kingdom.

Global brand recognition

The Company intends to expand global recognition of its brands in the energy sector

by using its own brand in its marketing activities. One aspect of this strategy is to

introduce its brands to existing domestic and international marketing businesses,

including at retail service stations, and further develop its petrochemicals and base

oil brands. For instance, Saudi Aramco Retail Company and Total Marketing recently

signed a share purchase agreement to jointly acquire the Tas’helat Marketing

Company, which operates a network of 270 retail gasoline service stations under the

“Sahel” brand name and 71 convenience stores across the Kingdom. The two

partners will invest SAR 2.8 bln in upgrading the existing retail facilities and

rebranding an equal number of the retail gasoline service stations with the two

partners’ brand names.

of 17



Financial Analysis

Income statement

Aramco’s topline is primarily generated by their upstream segment, which is

dominated by its crude oil sales. However, Aramco’s strategy of expanding its

downstream activities caused its share of sales to gradually increase since 2016. We

expect this trend to continue in accordance with their strategy and become on par

with the top five IOCs, where their share of revenues from downstream activities

averaged 83% in 2018.

The item “Other income related to sales” is mainly comprised of compensation

arising from the equitation mechanism implemented by the government in 2017.

This mechanism is designed to compensate the Company for its compliance with

government mandates to sell certain hydrocarbons within the Kingdom at regulated

prices. The regulated prices are typically lower than the prices at which the Company

could otherwise have sold such products. The Company may offset its income taxes

payable by the equalization amount in the period in which such taxes are due.

Roughly, half of operating costs are derived from two items: Royalty Taxes and

Purchases. Royalties attributable to the production of crude oil and condensate,

natural gas and NGLs are accounted for as an expense, rather than a deduction from

revenue, as was the case prior to 2017. Sales gas and ethane are not subject to

royalty; however, propane, butane, and other LPG are subject to a fixed royalty of

12.5%, applied to a factor of $0.035 per mmBTU.

The purchases item primarily consist of refined products, chemicals and crude oil

purchased from third parties for use in downstream operations to meet demand for

products in the Kingdom when it exceeds Aramco’s production of the relevant

product. Aramco also purchases products from third parties in certain markets

where it is more cost effective compared to procuring them from other business

units.

Aramco’s tax expense, which is primarily based on income arising in Saudi Arabia,

constitutes a significant expense for the company. Effective January 1, 2017, the

income tax rate applicable to Aramco decreased from 85% to 50%. In addition,

effective from January 1, 2018, a 20% rate applies to Aramco’s taxable income

related to the exploration and production of non-associated natural gas (including

gas condensates) as well as the collection, treatment, processing and transportation

of associated and non-associated natural gas and their liquids, gas condensates and

other associated elements.

Table 13:Marginal Royalty Rate on Crude Oil and Condensate Production

Crude Oil Price Old New*

Less Than or Equal to U.S.$70.00/bbl 20% 15%

Greater Than U.S.$70.00/bbl but Less Than U.S.$100.00/bbl 40% 45%

Greater Than or Equal to U.S.$100.00/bbl 50% 80%


* Effective 1st jan 2020

Table 12: Revenue Breakdown

SAR mln 2016 % of Rev 2017 % of Rev 2018 % of Rev 2H2019 % of Rev

Revenue 504,596 835,983 1,182,137 550,720

Upstream 360,963 72% 574,131 69% 776,233 66% 356,528 65%

Downstream 142,550 28% 260,642 31% 404,575 34% 193,655 35%

Other income related to sales - 150,176 152,641 17,023

Total Revenue 504,596 986,159 1,334,778 567,743


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Balance sheet

Aramco’s balance sheet stands out among industry players with its low leverage. In

2018, Aramco’s Debt to Total assets amounted to 8%, considerably less than that of

the top five IOCs, which averaged 17.6%. However, Debt to Total Assets spiked in

9M2019 to 12%, mostly due to the acquisition of PIF’s 70% equity interest in SABIC,

which was acquired for a total consideration of $69.1 bln (SAR 259.1 bln).

Despite this rise in leverage, the company’s gearing ratio in 9M2019 stands at 0.14%,

considerably below their target range of 5% to 15%. Due to Aramco’s low leverage

and gearing ratio, coupled with their expansion strategy, we expect their capital

structure to lean more towards debt in the coming years. This will help lower the

company’s WACC given their high income tax rate and low cost of debt, which will

add value to shareholders.

Since 2018, Aramco’s construction in progress constituted the largest component

of their PP&E. In terms of the Company’s capital expenditure allocation in the

medium term, the Company currently expects to spend 35% on liquids related

expenditures, 40% on gas-related expenditures and 25% on downstream-related

expenditures.

Table 14: Key Balance Sheet Items (Common Size)

SAR mln 2016 % 2017 % 2018 % 9M2019 %

Total Assets 940,703 1,102,553 1,346,892 1,457,412

PP&E 635,366 68% 751,134 68% 873,827 65% 948,486 65%

Cash & Cash equilivants 48,075 5% 81,242 7% 183,152 14% 171,842 12%

Total Labilties 205,357 22% 276,239 25% 318,457 24% 407,966 28%

Borrowings 52,459 6% 77,598 7% 101,318 8% 173,294 12%

Trade and other payables 52,139 6% 62,055 6% 72,286 5% 72,355 5%

Shareholder’s Equity 735,346 78% 826,314 75% 1,028,435 76% 1,049,446 72%

Share capital 60,000 6% 60,000 5% 60,000 4% 60,000 4%

Retained earnings 637,481 68% 721,107 65% 926,625 69% 950,734 65%


Exhibit 5:PP&E Components (SAR bln)


0

50

100

150

200

250

300

350

Crude oil

facilities

Refinery and

Petrochemical

facilities

Gas & NGL

facilities

General

service plant

Construction

in progress

2016 2017 2018 9m2019

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Forecast Summary

Larger contribution from downstream and

recovery in oil prices expected to support topline.

Operating margin expected to remain above 60%,

benefitting from Royalty Tax adjustment.

Despite hefty tax expense, net margin expected to

remain healthy, slightly below 30%.

Expansion plan and low gearing ratio means debt levels

are likely to rise going forward.

Dividends are expected to be above the minimum

dividend of SAR 1.40 per share...

...To avoid falling below their gearing ratio target of 5% -

15% and to compensate the principle shareholder of lost

tax revenue caused by the fiscal regime changes.

30

40

50

60

70

80

90

100

0

200

400

600

800

1,000

1,200

1,400

1,600

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Revenue (SAR bln) Oil price ($/brl)

52%

54%

56%

58%

60%

62%

64%

0

200

400

600

800

1,000

1,200

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Operating income (SAR bln) Operating margin (%)

0%

5%

10%

15%

20%

25%

30%

35%

0

200

400

600

800

1,000

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Net income (SAR bln) Income tax (SAR bln) Net margin

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Total debt (SAR bln) Debt/Total Assets

-10%

-5%

0%

5%

10%

15%

2020E 2021E 2022E 2023E

Gearing (with minimum dividend) Gearing (with RC dividend forecast)

1.6

1.8 1.9 2.0

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2020E 2021E 2022E 2023E

FCF (SAR per share) OCF (SAR per share) Dividend (SAR per share)

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Valuations

#1- Discounted Cash Flow Method

Our DCF valuation with forecasts assumed for 2020-2023E uses a long-term

terminal growth rate of 2.0% and risk-free rate assumption of 3.50%, and a risk

premium of 5.60%. WACC of 6.58% is assumed as the discount rate with a capital

structure comprising of 20% debt and 80% equity.

#2- Dividend Discount model

Our DDM valuation with forecasts assumed for 2020-2023E uses the same

figures used to calculate the WACC in the DCF method. We expect the average

long-term dividend payout ratio be larger than before, approximately 80%, given

the reduction in tax revenue to the principle shareowner caused by the fiscal

regime changes mentioned earlier.

Discounted Cashflow Valuation

Fig (SAR mln) 2019E 2020E 2021E 2022E 2023E

EBITDA 730,575 944,085 971,580 1,003,616 1,043,205

Tax (Zakat) (342,508) (446,640) (458,280) (472,101) (489,606)

Capex (155,730) (220,004) (166,606) (166,436) (169,960)

Working Capital -/+ 17,054 (14,393) (1,447) (17,643) (3,291)

Free Cash Flow To Firm 249,390 263,048 345,248 347,435 380,348

Discounted FCFF 246,207 302,457 284,887 291,907

Terminal Growth Rate 2.00% Risk Free Rate 3.50%

Terminal Value 8,463,233 Beta 0.80

PV of TV 6,557,952 Risk Premium 5.60%

PV of Cash Flows 1,132,377 Cost of Equity 8.00%

Net Debt 12,820 Cost of Debt 2.00%

EV 7,703,150 Tax rate 50.00%

Share Outstanding (mln) 200,000 WACC 6.58%

Fair Price (SAR) 38.52

Source: Riyad Capital

Dividend Discounted Model

Fig in SAR 2020E 2021E 2022E 2023E

DPS 1.60 1.80 1.90 2.00

Discount Factor 0.92 0.85 0.79 0.73

Discounted DPS 1.48 1.53 1.50 1.45

Terminal Growth Rate 2.00% RFR 3.50%

Terminal Value 33.4 Beta 0.80

PV of TV 24.6 ERP 5.60%

PV of DPS 6.0 Cost of equity 8.00%

Fair Price (SAR) 30.61

Source: Riyad Capital

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Target Price

We reach our target price of SAR 37.00 by taking the weighted average of the two

methods with 80% weight on DCF and 20% on DDM.

#3- Relative Valuations

While Aramco’s valuation appear expensive relative to the top five IOCs, we

believe the stock commands a premium mainly due to two factors. First,

operating and net margins far exceed that of the top five IOCs. Second, because

revenues are predominately derived from upstream, there is significant room for

value creation by raising Aramco’s share of downstream revenue to the same

level of the top five IOCs.

Risks to valuation

Global economic and political conditions and geopolitical events.

Adverse economic or political developments in Asia, where the substantial

portion of Aramco’s crude oil and refined products are consumed.

Development of new crude oil exploration, production and transportation

methods or technological advancements in existing methods, including

hydraulic fracturing or “fracking”.

Changes to environmental or other regulations or laws applicable to crude

oil and related products or the energy industry.

Changes in the fiscal regime of Saudi Arabia, to which the Company is

subject.

Fluctuations in the value of the U.S. Dollar, the currency in which crude oil is

priced globally.

Aramco vs Top 5 IOCs (2018)

Energy Reserves Oil Production N.Gas Production

Revenue EBIT Margin Net Income Margin EV/EBITDA P/E P/B P/CF (MMBOE) (MBPD) (MMSCF)

Chevron 596,389 59,674 10% 55,590 9% 7.0x 17.2x 1.4x 7.2x 12,053 1,782 6,889

Exxon Mobil 1,047,495 79,980 8% 78,150 7% 10.1x 19.5x 1.5x 9.2x 24,293 2,018 9,405

BP 1,120,335 66,308 6% 35,186 3% 6.8x 27.5x 1.4x 5.3x 19,945 2,091 8,600

TOTAL 690,398 65,775 10% 42,998 6% 5.8x 15.0x 1.3x 5.1x 12,050 1,566 6,599

Shell 1,456,421 105,375 7% 87,570 6% 4.7x 11.7x 1.6x 4.6x 11,372 1,803 10,805

ARAMCO 1,334,778 798,405 60% 416,518 31% 9.5x 20.2x 6.4x 16.8x 256,890 10,315 8,856

Source: Company reports, Bloomberg

Valuations (TTM)Income Statement (SAR mln)

Weighted Average of Valuations

Valuation Method Weight (a) Fair price (b) (a) *(b)

Discounted Cash Flows 80% 38.52 30.81

Dividend Discount 20% 30.61 6.12

12 Month Target Price (SAR) 36.93

Source: Riyad Cap ital

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Summary Financials, Ratios and Valuation

Financials and Forecasts

2017 2018 2019E 2020E 2021E 2022E 2023E

Income Statement (SAR mln)

Revenue 990,659 1,334,778 1,228,950 1,450,596 1,497,015 1,549,410 1,611,387

Royalties and excise and other taxes (140,893) (208,505) (195,762) (178,143) (183,844) (190,278) (197,890)

Purchases (126,093) (188,937) (194,624) (206,301) (214,553) (223,136) (232,061)

S,G&A Expenses (30,994) (31,250) (33,844) (50,898) (52,527) (54,365) (56,540)

Depreciation and amortization (37,175) (41,334) (48,594) (48,369) (52,868) (57,362) (61,950)

Operating Profit 582,915 798,405 688,146 895,716 918,713 946,254 981,254

Share of results of JV and Assoc. (956) (1,415) (1,432) (716) (358) (179) (90)

Finance and other income 1,569 3,865 3,168 4,118 4,160 4,201 4,243

Finance costs (2,090) (2,959) (4,865) (5,838) (5,955) (6,074) (6,195)

Net Income before Zakat 581,438 797,896 685,017 893,280 916,560 944,202 979,213

Income taxes (296,819) (381,378) (342,508) (446,640) (458,280) (472,101) (489,606)

Non-controlling interests (1,421) (322) 146 (21,356) (23,492) (25,841) (27,133)

Net Income 283,197 416,195 342,654 425,284 434,788 446,260 462,473

EPS 1.42 2.08 1.71 2.13 2.17 2.23 2.31

DPS 0.94 1.09 1.40 1.60 1.80 1.90 2.00

Payout Ratio 66% 52% 82% 75% 83% 85% 86%

EBITDA 618,027 836,114 730,575 944,085 971,580 1,003,616 1,043,205

Balance Sheet (SAR mln)

Assets

Cash & equivalents 81,242 183,152 167,220 150,204 128,699 122,442 95,055

Inventories 34,013 43,580 43,264 44,390 46,264 48,253 50,411

Accounts Receivable 86,892 93,818 86,026 101,542 104,791 123,953 128,911

Due from the Government 38,991 48,140 48,621 49,108 49,599 50,095 50,596

Total Current Assets 253,203 382,659 407,835 388,767 358,567 371,329 348,355

Property Plant & Equipment 751,134 873,827 987,110 1,158,744 1,272,482 1,381,556 1,489,566

Investment in associates and JVs 27,273 22,579 23,708 26,079 28,687 31,555 34,711

Intangible Assets 24,346 26,896 27,703 37,399 38,521 39,676 40,867

Total non-Current Assets 849,350 963,509 1,087,333 1,273,438 1,393,489 1,509,366 1,624,711

Total Assets 1,102,553 1,346,168 1,495,168 1,662,205 1,752,056 1,880,695 1,973,065

Liabilities & Equity

Short Term debt 8,906 29,989 37,486 41,235 45,358 49,894 51,391

Accounts Payable 62,055 72,286 81,121 83,232 86,745 90,473 94,520

Obligations to the Government 78,089 81,437 82,726 84,051 85,415 86,406 87,411

Total Current Liabilities 149,050 183,712 201,333 208,518 217,519 226,774 233,321

Long term Debt 68,692 71,329 142,554 171,065 183,039 210,495 233,650

Post-employment benefit obligations 38,191 23,209 38,256 42,082 46,290 50,919 56,011

Total non-Current Liab 127,189 134,021 221,551 255,194 272,733 306,228 335,940

Total Liabilities 276,239 317,733 422,884 463,712 490,252 533,002 569,262

Total Equity 826,314 1,028,435 1,072,285 1,198,493 1,261,804 1,347,693 1,403,804

Total Liab & Equity 1,102,553 1,346,168 1,495,168 1,662,205 1,752,056 1,880,695 1,973,065

Cash Flows Statment (SAR mln)

CFO 333,607 453,701 412,195 527,322 532,568 566,840 575,643

CFI (118,629) (131,205) (203,061) (233,292) (185,400) (197,566) (201,186)

CFF (181,811) (220,586) (225,066) (311,045) (368,673) (375,532) (401,844)

Cash at year end 81,242 183,152 167,220 150,204 128,699 122,442 95,055

Source: Company reports, Riyad Capital

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Ratios and Valuation

2017 2018 2019 E 2020 E 2021 E 2022 E 2023 E

Valuation

P/E 24.4x 16.6x 20.2x 16.3x 15.9x 15.5x 15.0x

P/B 8.4x 6.7x 6.5x 5.8x 5.5x 5.1x 4.9x

P/S 7.0x 5.2x 5.6x 4.8x 4.6x 4.5x 4.3x

P/CF 15.7x 13.8x 16.8x 13.1x 13.0x 12.2x 12.0x

EV/Sales 7.0x 5.1x 5.6x 4.8x 4.7x 4.6x 4.4x

EV/EBITDA 11.2x 8.2x 9.5x 7.4x 7.2x 7.0x 6.8x

EV/EBIT 11.9x 8.6x 10.1x 7.8x 7.6x 7.5x 7.2x

Dividend Yield 2.7% 3.1% 4.0% 4.6% 5.2% 5.5% 5.8%

Margins

EBITDA Margin 62% 63% 59% 65% 65% 65% 65%

EBIT Margin 59% 60% 56% 62% 61% 61% 61%

Net Margin 29% 31% 28% 29% 29% 29% 29%

Key Ratios

Net Debt/EBITDA (0.01) (0.10) 0.02 0.07 0.10 0.14 0.18

Cash Ratio 0.55 1.00 0.83 0.72 0.59 0.54 0.41

Current Ratio 1.70 2.08 2.03 1.86 1.65 1.64 1.49

Interest Cover 278.9 269.8 141.4 153.4 154.3 155.8 158.4

Debt to EBITDA 0.13 0.12 0.25 0.22 0.24 0.26 0.27

Debt to Assets 0.07 0.08 0.12 0.13 0.13 0.14 0.14

Debt to Equity 0.09 0.10 0.17 0.18 0.18 0.19 0.20

ROA 25.7% 30.9% 22.9% 25.6% 24.8% 23.7% 23.4%

ROE 34.3% 40.5% 32.0% 35.5% 34.5% 33.1% 32.9%

Key Per Share Metrics

EPS (SAR) 1.4 2.1 1.7 2.1 2.2 2.2 2.3

BVPS (SAR) 4.1 5.1 5.4 6.0 6.3 6.7 7.0

DPS (SAR) 0.9 1.1 1.4 1.6 1.8 1.9 2.0

Sales/Share (SAR) 5.0 6.7 6.1 7.3 7.5 7.7 8.1

Source: Company reports, Riyad Capital

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Stock Rating

Buy Neutral Sell Not Rated


Greater than +15%


between -15% and +15%

Expected Total Return less

than -15% Under Review/ Restricted

The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors

For any feedback on our reports, please contact [email protected]

Disclaimer

Riyad Capital is a Saudi Closed Joint Stock Company with Paid up capital of SR 200 million, licensed by the Saudi Arabian Capital

Market Authority NO.07070-37. Commercial Registration No: 1010239234. Head Office: Granada Business Park 2414 Al-Shohda

Dist. – Unit No 69, Riyadh 13241 - 7279 Saudi Arabia. Ph: 920012299. The information in this report was compiled in good faith from

various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report

are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no

representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital

does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed

as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy,

fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising

from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall

be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial

interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent

Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice.

There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which

represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and

assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any

investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative

of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides

information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor.

Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation

or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the

reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind

of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part,

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