Company / Analytics

Analytics, 06 May 2021

Saudi Aramco earnings and Oil Market Outlook

Saudi Aramco followed rival oil companies - Royal Dutch Shell and BP Plc - in reporting bumper first-quarter profits, indicating that global oil and gas markets are recovering. Earnings of global oil companies are back to pre-pandemic levels as major economies reopen and more people are vaccinated.

Saudi Aramco earnings

Saudi Aramco’s profit soared in the first quarter following a recovery in global oil and gas markets, though free cash flow remained too low to fully cover dividend payments.

Profits soared by 30% in the first quarter of the year, compared to last year, riding on the back of higher crude oil prices. The company’s financial results show a net income of $21.7 billion for the first three months of the year, compared to the same period in 2020 when Aramco’s earnings plunged to $16.7 billion as the early effects of the coronavirus pandemic were beginning to dramatically drive down global oil demand. Brent crude plummeted to around $20 a barrel at its lowest point last year.

The bumper results follow those last week of Big Oil rivals such as Royal Dutch Shell Plc and BP Plc, whose earnings are back to pre-pandemic levels as major economies reopen and more people are vaccinated. Brent crude has gained more than 30% this year to top $68 a barrel.

Aramco has seen its debt load spike after earnings collapsed last year with the spread of the pandemic and it opted to maintain the $75 billion annual dividends. In recent earnings, free cash flow was $18.3 billion. The company expects capital expenditure to be $35 billion in 2021, a figure unchanged from its forecast in March.

Aramco’s Chief Executive Officer Amin Nasser said the first-quarter earnings are a sign that “better days are coming.” “While some headwinds remain, we are well-positioned to meet the world’s growing energy needs as economies start to recover,” he said.

The Saudi Arabian Oil Co. said the increase in profits primarily reflects the impact of higher crude oil prices, which have averaged around $60 a barrel in recent months. Prices have steadily climbed amid increased global demand for crude and disciplined cuts by producers to balance the market.

The Saudi company remains one of the world’s most valuable companies. It produced some 9.2 million barrels a day in 2020, compared to a current average of 8.6 million barrels a day for the first quarter of 2021.

The company confirmed it would deliver on a promised dividend payout of $18.75 billion for its shareholders this quarter, or what amounts to $75 billion a year. Nearly all of that payout goes to the Saudi government, which owns more than 98% of the company, with the remaining 1.7% trading on the Saudi stock market. The payout, however, slightly exceeds Aramco’s current cash flow of $18.3 billion. Aramco saw its full-year profits nearly halved in 2020 to $49 billion, down from $88 billion in 2019 and $111 billion in 2018.

Gearing Unchanged

Gearing, a measure of net debt to equity, increased from minus 5% in early 2020 to 23% by the end of the year as Aramco borrowed to fund the dividend and buy a $69 billion stake in chemicals maker Saudi Basic Industries Corp. from the kingdom’s sovereign wealth fund. The debt ratio remained the same at the end of March but may fall this quarter because a U.S.-led group agreed to invest $12.4 billion in Aramco’s oil pipelines. The Saudi company is also considering selling a stake linked to its natural gas pipelines.

Aramco’s downstream business, which now includes contributions from Sabic, swung to a profit as higher commodity prices boosted margins for refined products such as transport fuels and plastics. Earnings before interest and tax for the unit were $4.4 billion, compared with a loss of $5 billion a year earlier.

The upstream business, mainly consisting of oil and gas production, saw earnings before interest and tax rise 6.4% to $40 billion. While it was buoyed by higher energy prices, Saudi Arabia’s OPEC commitments meant Aramco reduced crude output during the quarter to an average of 8.6 million barrels a day. That’s the lowest in a decade.

Despite the production cuts, Aramco’s capital expenditure is mostly directed toward pumping more oil. Capex rose by 19% in upstream and dropped 15% downstream. The company, which attributed rising spending on oil output to “ongoing increment projects,” has been instructed by the kingdom’s Energy Ministry to expand its maximum production capacity to 13 million barrels a day from 12 million a day.

Saudi Aramco said it expects to cut capital expenditure in the year ahead and lowered its guidance for spending to around $35 billion from a range of $40 billion to $45 billion previously. “Looking ahead, our long-term strategy to optimize our oil and gas portfolio is on track and, as the macro environment improves, we are seeing a pick-up in demand in Asia and also positive signs elsewhere, “its CEO said.

The company recently announced a $12.4 billion deal to sell leasing rights over its oil pipelines to a consortium of investors led by EIG Global Energy Partners. The sale is aimed at raising money to maintain Aramco’s dividend commitment to shareholders.

Prince Mohammed revealed in an interview last week there are talks to sell a 1% stake of Aramco to a leading global energy company. While he did not reveal further details, speculation has swirled around potential buyers from China, which is the world’s largest importer of oil.

Oil Market Outlook

Several oil analysts have upped their price forecasts for 2021 on vaccine and demand confidence, with Goldman Sachs predicting a rise to $80 per barrel by the third quarter of this year — something unimaginable when WTI prices went negative for the first time in history roughly one year ago.

International benchmark Brent crude is at $64.53 a barrel, up about 25% year-to-date and up a whopping 73% from one year ago.

Shares in the top western oil and gas companies including Royal Dutch Shell and BP dropped to multi-year lows in 2020, as the coronavirus pandemic wreaked havoc across the global economy and sparked a historic collapse in the price of oil. Exxon Mobil, the largest U.S. energy company, posted its first annual loss.

How did the stock move?

Aramco’s shares rose 0.6% to 35.6 riyals on Tuesday in Riyadh, extending their gain this year to 1.7%. The stock was trading at 35.65 SAR (Saudi Riyals) at the time of writing on May 06, 2021.

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