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Aramco sends off IPO signals

The company boosts key investor metrics, suggesting it has renewed its appetite for an IPO

Saudi Aramco yesterday announced a hugely increased dividend despite falling revenues—in a move that analysts suggest may be calculated to impress investors ahead of enacting its long-delayed public float.

The firm recorded drops in net income and Ebit in the first half of 2019, falls that substantially outstripped the decline in the firm's realised oil price. Net income for the first six months of 2019 was $46.9bn, down by 12pc from $53bn in the same period last year. Ebit was down by 9pc from $101.3bn to $92.5bn.

Nonetheless, reported free cash flow was up by 7pc from $35.6bn to $38bn and a whopping 233pc higher special dividend to its government sole shareholder. Increasing these metrics—which would boost investor attention in the event of a listing—suggest that its on-ice ambitions to publicly float a minority share of the firm may be back on the agenda.

20pc— stake in Reliance Industries' petchems arm

While Aramco's average realised crude oil price was down, from $69 to $66/bl, the drop is just 4.3pc and so does not fully account for fall in income. Crude oil production averaged 10mn bl/d during both periods and its bottom line was flattered by a 12pc fall in capex from $16.5bn to $14.5bn.

The most noticeable change was undoubtedly a major increase in the special dividend payment, from $6bn in the first half of 2018 to $20bn in the first six months of 2019. The bumper pay-out "reflected the exceptionally strong financial performance [Aramco] delivered in 2019," according to the firm's CFO Khalid al-Dabbagh.

The special dividend, combined with capex and ordinary dividends of $26.4bn, meant the firm paid out $60.9bn of cash in the first half of 2019, higher than the net cash $52.5bn provided by operating activities.

By contrast, in the first six months of 2018, net cash was marginally lower at $52.1bn but this was $3.6bn higher than outgoings from ordinary and special dividends and capex.

Petrochemical push

Aramco's downstream goal remains to further diversify its operations as well as grow and optimise the performance of its businesses. It aims to increase the proportion of petrochemical production in its overall portfolio, capturing incremental margin in the hydrocarbon value chain, according to al-Dabbagh.

In line with this strategy, Aramco has agreed to a non-binding letter of intent to acquire a 20pc stake in the refining and petrochemical arm of India's Reliance Industries. Under the proposed deal, Aramco would provide 500,000bl/d of crude oil for the venture.

Aramco's potential 20pc stake is based on a valuation of $75bn for the oil-to-chemicals division, according to Reliance making it one of the largest foreign investments ever made in India.

On an analysts' call, al-Dabbagh stressed that the project was still at "a very early stage" and further work would be needed before it could be put before the company's board for approval.

"Supply of 500,000bl/d represents about 40pc of Reliance's crude intake, significantly higher than the stake taken, although Saudi Aramco historically supplied 20pc of Reliance's crude requirement," says Alan Gelder, vice president refining and chemicals at consultancy Wood Mackenzie. Aramco "continues to show keen interest in accessing the Indian market, which has the strongest long-term growth prospects," he adds.

Relations between Saudi Arabia and India have warmed since King Salman's ascension to the throne in 2015. The following year, prime minister Narendra Modi visited the kingdom. Crown prince Mohammed bin Salman made an official visit to India in February this year.

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