Saudi Aramco followed its other Big Oil competitors to record bumper earnings, enhanced by a recovery in the prices of oil and chemicals. The biggest energy company globally made a net income of 95.5 billion riyals ($25.5 billion) in the second quarter of this year, which is the highest level since the end of 2018.
Free cash flow increased to $22.6 billion, above the state-controlled company’s quarterly dividend of $18.8 billion for the first time since the start of the COVID-19 pandemic. The reopening of most major economies has resulted in a surge in commodity prices, with crude up nearly 35% in 2021.
In the last two weeks, oil firms like Chevron Corp, BP Plc, and Royal Dutch Shell Plc have confirmed an increase in share buybacks and payouts. All of these companies are confident that the worst of the pandemic is over.
Aramco’s yearly dividend of $75 billion, the biggest in the world, is a critical source of funding for Saudi Arabia. The government owns 98% of the company and it is trying to narrow its budget deficit that exploded in 2021 as energy prices dropped with the spread of the virus.
The Chief Executive Officer Amin Nasser said in an August 8 statement:
“The results reflect a strong rebound in worldwide energy demand and we are heading into the second half of 2021 more resilient and more flexible, as the global recovery gains momentum. I remain extremely positive about the second half of 2021 and beyond.”
But, the pandemic is still not yet over and Nassir acknowledged that on a call with reporters. Oil has had its worst week since October as the spread of the delta variant, mostly in China, clouds the near-term outlook. Brent crude lost 7% to trade at $70.70 per barrel.
Global oil demand seems to remain below pre-Covid levels, but is expected to reach a near-record high of 100 million barrels per day in 2022, according to Nasser.
Debt Is Falling
Aramco seems to be getting ready even as a measure of net debt to equity dropped to 19.4% from 23% at the end of last year. However, it remains above management’s preferred cap of around 15%. It declined due to higher cash flow and the Dhahran-based company using some resources from the sale of a stake in its oil pipelines to pay down debt.
In June 2021, Aramco completed a $12.4 billion deal with a consortium that was led by U.S. group EIG Global Energy Partners LLC. Capital expenditure was around $15.7 billion in the first half of 2021 and Aramco anticipates it to reach about $35 billion for all of 2021, in line with earlier guidance.
Some of the money will be pushed toward boosting daily crude-production capacity to 13 million barrels from the current 12 million. Nasser said:
“With less investment that we see from other producers globally, this creates an opportunity.”
At the current CAPEX levels and crude prices, most of the oil market analysts expect that Aramco can cover its dividend commitment with free cash flow. Those analysts at the Bank of America even said that the payout needs to be increased for Aramco to remain competitive now that the Western oil companies are hiking their shareholder returns.
Aramco’s chief financial officer, Ziad al-Murshed, said on the same call:
“We’ll advise later this year whether we’ll be sticking to the ordinary dividend or doing otherwise.”
For now, Aramco is doing due diligence on a proposed investment in Reliance Industries Ltd.’s oil-to-chemicals refining business. In 2019, Aramco officially discussed buying a 20% stake for nearly $15 billion, but this deal was delayed by the pandemic. It should be finalized this year, as explained by India’s Reliance in June.
The Saudi company’s upstream business, mainly comprising of oil and gas production, saw the earnings before interest and tax rise to $45.3 billion between April and June. All that is contained in a more detailed financial statement that the company published on August 9. That represented an increase of 208% from the past year and 13% from the first quarter.
Crude oil production has been held back since 2021 by Saudi Arabia’s OPEC commitments, averaged 8.6 million barrels per day.
OPEC+, the Organization of Petroleum Exporting Countries and its allies, comprises 23 nations. It started unexpected supply limitations to underpin market prices after the onset of the pandemic. Saudi Arabia, the cartel’s de facto leader together with Russia, implemented more limitations on top of what OPEC needed, although these curbs are scheduled to end this quarter.
Aramco’s downstream unit made a $4.6 billion profit before interest and tax in the second quarter, up from a loss in the same period of 2021. It was assisted by high margins on refined products and contributions from Saudi Basic Industries Corp., a chemicals company that Aramco owns 70%, reported excellent results in nearly ten years in the past week as demand for paint, plastics, and packaging materials explodes.
The Saudi oil company will hold an investor call in the coming days. The Saudi Aramco stock price surged by 0.3% to reach 35.15 riyals in Riyadh on August 8.