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Aramco’s massive income leap spurs talks of dividend increase

Aramco reported a 288% increase in net income to $25.5 bn for Q2, while maintaining its quarterly dividend of $18.8 bn. Should it increase this payout to stay competitive with big oil?

Aramco said net income for the first half of the year was $47.2 billion Companies such as BP and Shell raised dividends after reporting strong earnings Oil prices have surged some 40% in 2021 to around $70 a barrel

Aramco reported a 288% increase in net income to $25.5 bn for Q2, while maintaining its quarterly dividend of $18.8 bn, as big oil benefits from higher prices and a recovery in worldwide demand. 

Aramco’s net income was $6.6 billion in the same quarter of 2020.  

“Our Q2 results reflect a strong rebound in worldwide energy demand as the global recovery gains momentum,” Aramco president and CEO Amin Nasser said in a company statement published Sunday, August 8.

Aramco said net income for the first half of the year was $47.2 billion, compared to $23.2 billion in the first half of 2020, representing a 103% increase.

Aramco said free cash flow was $22.6 billion in the second quarter and $40.9 billion for the first half of 2021, compared to $6.1 billion and $21.1 billion, respectively, for the same periods in 2020. 

“A dividend increase is needed to stay competitive,” BofA analysts said in a research note ahead of the earnings release. “Higher oil prices and OPEC+ driven production increases should support a significant free cash flow increase over the next couple of years,” it added.

Dividend divide

Saudi Aramco will have to raise its already massive annual dividend of $75 billion if it wants to remain competitive with other oil giants and raise its dividend yield to the average for international oil majors, Bank of America said in a note carried by Bloomberg.

ExxonMobil, Chevron, and BP, for example, each have a dividend yield of over 5%, while Aramco’s is around 4%, Bloomberg notes.

Companies such as BP and Shell raised dividends after reporting strong earnings for the second quarter of 2021, driven by higher oil prices.  

Saudi Aramco, whose largest shareholder is the Saudi Arabian government with 98%, borrowed heavily to maintain its dividend during the slump in prices caused by the coronavirus pandemic last year.  

Borrowing also rose last year after it was forced to absorb the $69 bn acquisition of a majority stake in SABIC, the Saudi chemicals company, from the kingdom’s Public Investment Fund at the time of a cash crunch. 

Aramco said its dividend is staying at the “normal level” for the quarter, but it would “advise later” as to whether it would stick to the current payout plan. 

Yousef Husseini, equity research analyst at EFG Hermes, said Aramco may be keeping the extra cash for taking part in the new state-backed Shareek (Partner) initiative, to partner with private sector investments.

“I think the reason they maintained [the dividend] and our rationale was that they are retaining money to invest in future projects and particularly the Shareek program,” he said.

Oil prices

Oil prices have surged some 40% in 2021 to around $70 a barrel.

“Our expectation is that the recovery will continue,” Nasser said. “We are seeing more openings of economies, and we expect by year-end the demand will be around 99 million barrels… and 100 million barrels next year as a forecast for total demand,” he added.

Aramco CEO Amin Nasser

Aramco’s CAPEX was $7.5 bn in the second quarter and $15.7 bn for the first half of 2021, representing an increase of 20% and 15%, respectively. Aramco said 2021 CAPEX was expected to be approximately $35 bn.

CAPEX will help Aramco complete the planning and design phase for its targeted capacity increase from 12 million barrels a day to 13 million, some two years from now.

Strong results by top oil players

Exxon Mobil last month said its net income for the second quarter came in at $4.69 bn, or $1.10 per share, compared with a loss of $1.08 bn, or 26 cents per share, a year ago. 

Royal Dutch Shell reported its highest quarterly profit in more than two years, with adjusted earnings at $5.53 bn, compared with earnings of $638 million a year earlier.