Aramco's offering sheds welcome light on Saudi finances

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      By Michael A. Cirami, CFA, Co-Director of Global Income, Eaton Vance Management and Eric Stein, CFA, Co-Director of Global Income, Eaton Vance Management

      Boston - The move by Saudi Arabian Oil Co. - better known as Aramco - to tap the public bond markets for the first time represents an important step for improved transparency and disclosure on the part of the Saudis.

      In a prospectus circulated last week, Saudi Arabia announced plans for a bond issuance of at least $10 billion to help fund the acquisition of a $69.1 billion stake in Saudi Arabia's national petrochemicals firm. With 2018 profits of $111 billion, Aramco qualifies as the world's most profitable company, larger than Exxon and Apple combined. Aramco's finances had been a state secret for more than three decades, following the nationalization of the firm.

      The prospectus revealed an efficiently run company and sheds light on how low-cost the kingdom's reservoirs truly are. The new information should help investors improve their assessments not just of Aramco, but of Saudi sovereign debt as well. In 2018, the oil company paid out about $160 billion in income taxes, dividends and royalties. Such specificity clearly helps investors get a handle on Aramco's potential finances over a range of oil price scenarios. However, it is worth remembering that Saudi Arabia can still tap into Aramco's resources at its discretion.

      Aramco's creditworthiness gives it the unique potential to attract crossover investors from the investment-grade sector, which may lead to interesting valuations. In our view, the fundamentals and governance structure don't support a spread tighter than the sovereign debt, but demand from crossover buyers could push it through that level.

      Bottom line: We applaud the additional transparency and disclosure from Saudi Arabia - it is an auspicious entrance for Aramco into world capital markets.