Question

What is ARAMCO? Why are low yields on its bonds a surprise?

Answer 1

ARAMCO

- Saudi ARAMCO is the biggest oil, petroleum and natural gas company in the world. It was originally formed by an agreement between California based oil company Socal and Saudi Arabia. Later on the Saudi Arabia Goverment purchased complete stakes, making it a state-run company.

- ARAMCO is seen as a radical measure of 'Saudization' where the economy of Saudi Arabia is open to other countries. Though it is owned by Saudi Government, the top management constitutes of American Nationals and the rest of the management is constituted of Saudi Arabians only.

- It contributes to 1/8th portion of barrel supply in the world. ARAMCO has the second largest production of daily oil as of today.

- Aramco recorded the highest profit till date at USD 111.1 billion. the profits are in multiples of it debt structure.

Low Yields Surprise

Let us first see the USD 12 billion debt issues of ARAMCO:

- A 3-year $1 billion bond maturing in 2022 which yields 2.375% or 55 bps above US Treasuries,

- A 5-year $2 billion bond maturing in 2024 which yields 2.125% or 75 bps above US Treasuries,

- A 10-year $3 billion bond maturing 2029 which yields 2.625% or 105 bps over US Treasuries,

- A 20-year $3 billion bond maturing 2039 which yields 3.375% or 140 bps over US Treasuries,

- A 30-year $3 billion bond maturing 2049 which also yields 3.375% or 175 bps over US Treasuries.

(Note that they are still expensive when you compare them with Chevron and Exxon Mobile.)

1. The yields are lower than the bonds issued by the Saudi Government's dollar denominated debt. Usually investors perceive that if such a big company which is state owned, defaults will lead to the government paying back. Such defaults means more risk which leads to the increased expectations from investors in terms of yield.

2. The investors are more driven by higher yields but despite enormous profits the State owned company is resilient and structures the debt with the lowest cost. This is despite it high return on capital employed.