The Economist - USA (2019-08-17)

48 Business The EconomistAugust 17th 2019

1

T

he earningscall lasted about half an

hour and was, by conventional mea-

sures, underwhelming. Saudi Aramco, the

world’s most profitable company, gave no

guidance on capital spending. Its finance

chief, Khalid al-Dabbagh, said (cryptically)

that dividends must be “affordable”. He did

not disclose where or when it might list its

shares. The oil giant’s first such interaction

with public investors on August 12th was

still revealing. It showcased the firm’s evo-

lution—and the forces that may impede it.

National oil companies face a hazy fu-

ture. American shale output is booming

and long-term demand for fossil fuels

looks less certain as concerns about cli-

mate change mount. Still, Aramco enjoys a

privileged position, as its results for the

first half of the year demonstrate. It pro-

duced an average of 10m barrels of crude a

day, plus another 3m or so barrels of oil

equivalent from natural gas. Its $46.9bn in

net income eclipsed that of its five biggest

listed rivals—ExxonMobil, Shell, Chevron,

bp and Total—combined (see chart).

The numbers add new detail to the for-

midable portrait painted by Aramco’s first

international bond prospectus in April.

The $12bn issue’s success has revived plans

to list 5% of Aramco’s shares. Muhammad

bin Salman, Saudi Arabia’s crown prince,

declared in 2016 that an initial public offer-

ing would value the company at more than

$2trn, raising $100bn to invest in other sec-

tors. It may come as soon as next year.

That is where the earnings call comes

in. It was less an exchange of information

than an awkward dress rehearsal—a

chance for investors to familiarise them-

selves with Aramco and vice versa. Mr al-

Dabbagh conjured an image of dominance

today and outlined plans to extend it to-

morrow. The firm is expanding its trading

arm and striking deals to secure demand

for its crude and diversify its revenue. Like

others in the industry, it expects appetite

for petrochemicals to jump. In March

Aramco said it would buy 70% of sabic, a

petrochemical giant, from Saudi Arabia’s

public investment fund for $69bn. On Au-

gust 12th Reliance Industries, an Indian

conglomerate, said that Aramco would pay

$15bn or so for a 20% stake in its refining-

and-petrochemicals business. The Saudi

firm will supply Reliance with up to

500,000 barrels a day of crude, helping to

lock in a long-term customer. It has struck

deals in China, Malaysia and South Korea.

Aramco could yet trip up. Some down-

stream projects may take years to material-

ise, notes Alan Gelder of Wood Mackenzie,

an energy-research firm. It boasts of

“99.9%” reliability of its supply, but ten-

sions with Iran threaten exports through

the Strait of Hormuz. Expanding a pipeline

to the Red Sea will help only a bit. The Saudi

kingdom is hungry for revenue; dividends

in the first six months of 2019 were 22%

larger than free cashflow because Aramco

paid a “special dividend” of $20bn on top of

an ordinary one of $26.4bn (the company

invoked the “exceptionally strong financial

performance” of 2018).

Most important, the oil price is sinking.

It pulled Aramco’s net income in the first

half of 2019 down by 12% compared with

last year. To support prices, Saudi Arabia

has brokered production cuts by the opec

cartel of oil-producers and slashed its out-

put by 7% from December to June. If rising

fears of a global economic slowdown keep

oil markets depressed, a listing may be de-

layed. Again. 7

NEW YORK

Facing an uncertain future, Saudi

Arabia’s oil colossus tries new moves

Saudi Aramco

Tap dance

Princelysums

Source:Company reports

Oilandgasproduction

m barrelsofoilequivalentperday

Netincome,$bn

Oilcompanies,January-June 2019

Saudi

Aramco

Others

To t a l

Royal Dutch

Shell

ExxonMobil Chevron

BP

024681012141618

0 1020304050

Saudi

Aramco

Others

T

he lastthree months have been hard

on China’s most valuable public tech-

nology companies. Or, at least, on their

share prices. In May Alibaba and Tencent

lost more than a tenth of their value in the

week after President Donald Trump re-

stricted the export of American technology

to Huawei, a privately held Chinese tele-

coms giant. Investors feared that knock-on

effects from the ban might hurt other Chi-

nese tech businesses by, for instance, mak-

ing it hard for them to source cutting-edge

components and software from America.

You would not have guessed, looking at

the latest batch of quarterly results. Take

Tencent, which owns WeChat, a ubiquitous

all-in app, makes mobile games and much

cyberstuff besides. On August 14th it re-

ported that a new hit game—which lured

users of its most popular title, banned by

Chinese censors earlier in the year—pro-

pelled its profits to 21.4bn yuan ($3.4bn),

from 17.9bn yuan in the same period last

year. Revenues rose by 21%, to 88.8bn yuan.

Or jd.com, an e-merchant, whose healthy

revenues, posted earlier in the week, re-

vived a sagging share price. Analysts expect

Alibaba, China’s e-commerce titan, which

was due to publish its second-quarter re-

sults on August 15th after The Economist

went to press, to notch up sales of 111bn

yuan and rake in a net profit of 10.3bn yuan,

an increase of 35% and 26% year on year, re-

spectively. Xiaomi, a device-maker, and

Meituan, a food-delivery firm, which both

announce second-quarter earnings next

week, are also forecast to report rising rev-

enues. Growthless Baidu, China’s search

giant, is an outlier.

Huawei itself shows that even the long

and mercurial arm of American law can do

little to hobble the stars of Chinese tech-

nology. Many of their employees feel ener-

gised by the tech tussle, seeing it as both a

validation of Chinese prowess and an op-

portunity to increase the independence of

China’s burgeoning technology ecosystem

from America’s government. Finally, Chi-

nese have something their American rivals

do not: near-total control of their country’s

vast domestic market, second in size only

to America’s but growing much faster.

Still, Chinese tech is not invulnerable.

Tencent’s revenues came in lower than an-

alysts had forecast, in part owing to disap-

pointing advertising sales. In that business

it faces new competition from ByteDance, a

Beijing-based startup which also makes

HONG KONG

The trade war is making China’s tech

industry more inward-looking

Chinese technology firms

Stuck in the

Middle Kingdom