Complex Made Simple

Aramco is profitable, liquid, and flexible in good times and bad

Saudi Aramco is massive but its size doesn’t deter it from having the kind of flexibility it needs to not only survive harsh times but actually thrive even in periods of economic uncertainty such as today’s prevailing conditions

Aramco reported a 30% jump in net income in Q1 2021 rising to $21.7 billion, up from $16.6 bn in Q1 last year New talks of a 1% sale of Aramco shares might see the stake possibly sold directly to a Chinese or Indian entity The main source of instability in oil markets is to be expected to come from within OPEC+

Saudi Aramco is massive but its size doesn’t deter it from having the kind of flexibility it needs to not only survive harsh times but actually thrive even in periods of economic uncertainty such as today’s prevailing conditions.

Profitability on the rise again 

Aramco reported a 30% jump in net income in Q1 2021 rising to $21.7 billion, up from $16.6 bn in the same period last year.

It beat some analysts’ estimates of $17.24 bn and the figure nears the firm’s net income level in Q12019 of $22.2 bn.

The company said free cash flow Q1 2021 was $18.3 bn, up from $15 bn over the same period last year. 

The earnings reflect a dramatically improved climate for oil markets since the first quarter of last year when Aramco reported a 25% fall in net income as it grappled with the initial fallout of the pandemic and cratering global demand.

Aramco is now benefitting from the recovery in oil markets, with international benchmark Brent crude prices roughly double what they were this time last year, and currently hovering around $70, up 30% this year.

Operational flexibility

OPEC+ output reductions and the extra 1 million barrels per day (bpd) voluntarily cut by Saudi Arabia, lowered the Kingdom’s crude oil output to around 8 million bpd in February and March (the lowest level since 2008)

Aramco’s $21.7 bn in net profits for that period exceeded the consolidated net profits from the five major IOCs (ExxonMobil, Chevron, Shell, BP, and Total) which totaled $17.8 bn.

Operational flexibility was evident when Saudi Aramco swiftly cut production from a historical peak of 12.3 million bpd in April 2020 to about 7.5 million bpd in June, within only two months, while other large producers would have taken longer periods to adjust only 200,000 bpd, according to Faisal Faeq, an energy and oil marketing adviser, and formerly with Aramco.

Read: Saudi Aramco upbeat, at least with share prices up, following dividend cut announcement

Read: Aramco attracts FDI, raising $12.4 billion selling oil pipeline stakes- IPO dreams evaporate

Funding capacity 

The company has flagged significant asset sales over the past few months, most recently an announcement by the kingdom’s Crown Prince Mohammed bin Salman in late April to sell 1% of Aramco to a “leading global energy company.”

In mid-April, the company signed a deal to sell a 49% stake in its pipelines to EIG Global Energy Partners, a U.S.-led consortium for $12.4 bn.

Also, the new Shareek initiative will enable the state-backed oil giant and Saudi petrochemicals firm SABIC, among other large domestic companies, to lead investments into the Saudi private sector worth $1.3 trillion) by 2030, by reducing dividends paid to the government. 

Being over 98% owner of Aramco shares following a 2019 partial IPO of 1.5% of the company on local stock exchange Tadawul, the Saudi government is the biggest earner of a $75 bn annual dividend pledge by Aramco.

 Now, new talks of a 1% sale of Aramco shares might see the stake possibly sold directly to a Chinese or Indian entity.

What else is needed for Aramco?

For Aramco’s results to continue to improve in the future, the company will need oil market fundamentals to improve. Overall global oil demand is projected to grow in the coming years, but the negative repercussions of the EU’s Green Deal, Biden’s Green Deal, and energy transition strategies will undoubtedly impact the oil market.

Also, the main source of instability in oil markets is to be expected to come from within OPEC+. Two of the major producers within this new oil cartel (Russia, UAE) are vying for increased market share, while others are suffering from the burden of production cuts.

OPEC production

In a monthly report, OPEC said demand will rise by 5.95 million barrels per day (bpd) this year, or 6.6%. The forecast was unchanged from last month.

The report’s optimism comes even as it warns of “significant uncertainties,” mainly around the pandemic, and as concern about India weighs on oil prices.  

In the report, OPEC cut its oil demand forecast for the second quarter by 300,000 bpd and raised its estimate for the third quarter by 150,000 bpd and by 290,000 bpd for the last three months of 2021.

A May increase of 600,000 bpd was agreed from the OPEC+ coalition.

OPEC’s crude oil production is estimated to have increased to a three-month high of 24.96 million barrels per day (bpd) in April, thanks to a major jump in Iran’s output, the latest survey by Argus showed.

Iran is exempted from the OPEC+ cuts, is estimated to have pumped 2.35 million bpd in April.