Saudi Aramco, the national oil company of Saudi Arabia, is by far the largest oil company in the world. The company produces around 13% of the world’s oil, but its business operations have been notoriously opaque for decades. It has often been stated that the company has plenty of low-cost legacy wells that drop its overall production costs to $10 per barrel, or even lower.
Because there was no way to audit this information, the world was left to guess at the actual breakeven costs for the world’s largest oil company. This week Saudi Aramco lifted the veil on its financial condition in a bond offering for the company. (PDF link here).
There are many important financial details in the filing. The company is indeed the world’s most profitable, earning $111 billion on $356 billion in revenue in 2018. This is nearly double the $59.4 billion made by Apple, the world’s second-most profitable company, in 2018. It’s also over five times the $20.8 billion made by ExxonMobil last year.
Bloomberg points out that Aramco’s “funds flow from operations” was $26 per barrel last year, which they note was worse than Shell or Total which reported $38 and $31, respectively.
However, I found the most significant item in the prospectus to be that Saudi Aramco struggled to break even in 2016 when Brent crude averaged about $45 per barrel. Net income in 2016 was only $13 billion, and free cash flow a mere $2 billion. Contrast that with the $111 billion in income and $86 billion in free cash flow the company made in 2018 (when Brent crude averaged $71.34/bbl), and it looks like Aramco’s breakeven price is just about $40/bbl.
No wonder OPEC threw in the towel in 2016 and decided to abandon its price war with U.S. shale. OPEC’s largest member saw its income dry up and was on the verge of posting a loss if oil prices didn’t turn around. I once characterized OPEC’s decision to declare war on U.S. shale oil producers as a trillion dollar miscalculation, and at least now we can see that it likely cost Saudi Aramco alone several hundred billion dollars.
The implications of this news are that we will likely never again see an extended period of time with world oil prices below $45, because OPEC will have to take action at that point to prop up prices as the cartel did in 2016. Otherwise, they will quickly find themselves in deep financial trouble, unable to balance government budgets.
So, if you do see oil prices dip back down to that level, it’s definitely time to buy. Unless, of course, demand for oil has peaked and is on the decline. But that’s an argument for a different column.