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Fitch Ratings affirmed Aramco’s long-term issuer default rating (IDR) at A+ with a stable outlook, keeping the company firmly in the top-tier credit league, according to a recent report. Meanwhile, Aramco’s standalone credit profile (SCP) was at AA+, placing it as the country’s highest ranked issuer with respect to the measure. The state-owned oil giant’s credit rating is constrained by Saudi Arabia’s sovereign rating due to the firm’s strong association with the Saudi government as its majority shareholder
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REMEMBER: Aramco closed its first bond sale in three years in July and tapped the debt market again in August — raising a combined USD 9 bn so far this year.
Why Aramco’s rating held firm: Fitch cites several factors as helping sustain Aramco’s rating, including a robust financial profile, prudent decision making and oversight, strong free cashflows (FCF) and reserves, and conservative financial policies. “We assess the preservation of government policy role factor as ‘Very Strong’ due to Saudi Aramco’s key role in the Saudi Arabian economy as a key provider of feedstock to the country’s power generation fleet and other key end-markets,” the report said. Despite not needing government support in the past, Fitch believes that there are ‘strong’ precedents for support from the Saudi government based on a track record of backing for other government-related entities.
Aramco might need to tweak its dividends policy if fundamentals change: Saudi Aramco has been able to sustain its generous base and performance-linked dividends policy so far, but the payouts have consumed substantial liquidity with performance-linked dividends accounting for 50-70% of FCF net of base dividends and other outlays. Fitch maintains that the policy has not adversely impacted Aramco’s credit outlook due to the assumption that Aramco has the “flexibility to reconsider” its payouts if oil prices plummet or capex exceeds projections.
ICYMI: Saudi Aramco swung into a net debt position for the first time in two years in 3Q, as the oil major continues to distribute dividends that exceed its earnings. The oil major will have to decide early next year between maintaining its generous payouts to shareholders — and consequently increasing borrowing — or cutting back dividends and depriving the Saudi state of key financing it needs to shore up its budget
Despite being comfy at the moment, Aramco still faces noteworthy risks: Its rating remains tethered to Saudi’s sovereign rating of A+, meaning any downgrade in the Kingdom’s rating would directly impact the oil company. Fitch also cites lower oil prices, higher capex, more leveraging, and a faster-than-expected energy transition as additional factors that could adversely affect the oil major’s credit rating.
