The world’s largest oil company, state-held Saudi Aramco, is looking to withstand the crisis created by the worst oil demand crash in history—by doubling down on oil.
Saudi Aramco is determined to outlast peak oil demand—whenever this occurs—and to squeeze every dollar it can from its portfolio and from Saudi Arabia’s remaining oil reserves.
Unlike many major international oil companies, the Saudi state giant is not pledging a shift to low-carbon energy or net-zero emissions. Its core business is pumping low-cost oil in Saudi Arabia, and it will remain such for as long as the world needs oil.
But just like Big Oil, Saudi Aramco listens to its shareholders. The caveat is that Aramco’s majority shareholder with an overwhelming 98 percent is the Kingdom of Saudi Arabia, which—even after the much-hyped IPO last year—continues to influence the company’s strategy, taxation, dividend policy, and even the level of oil production. After all, Saudi Arabia is the leader of OPEC and of the OPEC+ production pact.
After the price crash this year, Aramco’s revenues and profits dropped, and debt soared, also because of the acquisition of petrochemicals giant SABIC. The worsening of the finances was no surprise at all, considering that every oil company in the world suffered from the collapse in oil prices, created by the pandemic and by Saudi Arabia itself, which flooded the market with oil with record-high exports in April when global demand was crashing by 20 million barrels per day (bpd).
For Big Oil, losses in the pandemic have weighed on share prices and have intensified calls from investors for emissions reductions. For Aramco, the lower profits and higher debts are a direct hit to the whole economy of Saudi Arabia and to the plans of Crown Prince Mohammed bin Salman to diversify the Kingdom’s economy 2030, by using the oil money Saudi Arabia gets.
Aramco is now trying to contain the damage from this year’s crisis, while keeping the pledge to pay out annual dividends of US$75 billion to shareholders, the Kingdom being the largest of them.
The Saudi oil giant has cut capital expenditure (capex) and is reportedly looking at further cuts amid reduced cash flows and profits and mounting debt to levels above the company’s targets.
Aramco guided in the Q2 results release for capex at the lower end of the US$25 billion-US$30 billion range for 2020. In August, the Financial Times reported that Aramco was considering additional cuts to its capex in order to be able to pay its massive dividends, the vast majority of which goes to the Kingdom of Saudi Arabia.
Aramco is also reportedly suspending its investment in a joint venture developing a US$10-billion refinery and petrochemicals complex in China.
The oil giant is now looking to optimize its portfolio and “squeeze” more value out of it, including by potentially selling assets, Aramco’s chief executive Amin Nasser told Energy Intelligence in an interview published this week.
“We’re going to do it right and will make sure what’s executed by this organization is in line with our long-term view — the strategy of retaining our core businesses in-house and what can be optimized with our partner,” Nasser told Energy Intelligence. Two months ago, Aramco created a Corporate Development unit, which “will focus on growth opportunities as we further sharpen and strengthen our strategic focus to optimize our portfolio and, in doing so, maximize value for our shareholders,” Nasser said at the time.
Asset sales could, to some extent, shore up finances at Aramco, which has seen its debt surge over the past half year, not only because it sold oil at much lower prices than it did at the start of this year, but also because of its US$69-billion acquisition of SABIC.
As of June 30, Aramco’s net debt was US$76.146 billion, compared to a net cash position of US$565 million as of December 31, before the SABIC deal was completed. Gearing—the measure of the degree to which Aramco’s operations are financed by debt—jumped to 20.1 percent in June from -0.2 percent in December 2019, according to Aramco’s Q2 report.
“The increase in leverage has been driven by a combination of its acquisition of SABIC, dividend distributions and low oil price,” Fitch Ratings said last month when it kept Aramco’s A rating with a “stable” outlook.
The company may need to take additional measures to bring gearing in line with its own target of 5 percent to 15 percent, such as disposals or dividend cuts, Fitch noted.
In addition, the ambitious dividend target of US$75 billion in annual dividends could lead to Aramco’s post-dividend free cash flow (FCF) turning negative in 2020 and 2021 before broadly breaking even in 2022-2023, according to Fitch.
The Kingdom’s Cash Cow
A dividend cut will likely be the very last resort for Aramco because Saudi Arabia’s government relies on the proceeds from oil and the dividends from its state oil giant now more than ever, given the shrinking economy with the pandemic and the oil price collapse.
So asset sales and further increasing its debt are the most likely pathways for Saudi Aramco if it is to keep its dividend commitment. And it will likely keep it because the Kingdom needs every dollar it can rake in from oil in order to contain the damage to its economy and government finances.
The Saudi leadership needs Aramco’s money both for the immediate and long-term future, Neil Quilliam, head of Middle East-focused advisory firm Azure Strategy, told Bloomberg last month.
“In the process, they will likely damage the country’s most profitable company,” Quilliam said.