Saudi Aramco is still making billions in profits, but billions less than it should have as lower oil prices and the coronavirus crisis erode revenues.
The impact will be felt on the Saudi government, the majority owner of the national oil company (NOC), and whose revenue is around $250 billion annualized and depends mostly on oil revenues.
Aramco’s Q3 numbers
Saudi Arabia’s Aramco on November 3, 2020, reported a 44.6% drop in Q3 net profit.
It reported that its Q3 2020 profits decreased to 44.21 billion Riyals ($11.79 bn) from 79.84 bn Riyals ($21.29 bn) in Q3 2019.
“We saw early signs of a recovery in the third quarter due to improved economic activity, despite the headwinds facing global energy markets,” Saudi Aramco chief executive officer Amin Nasser said in a statement.
Aramco has a near $2 trillion market capitalization, making it the second most valuable publicly-traded company in the world. The company is trading at a profit to equity (P/E) ratio of roughly 40.
For 2020, Aramco indicated that its total CAPEX is expected to be at the lower end of the $25 billion to $30 billion range for 2020.
The oil company produced 12.4 million barrels/day of oil equivalent for the first 9 months of 2020.
OPEC+ already has production cuts of 7.7 million barrels/day, although in January 2021, that decreases by 2 million barrels/day.
Impact on Saudi economy
By reporting a 44.6% decrease in profits in Q3 2020, Aramco has put a major damper on Saudi Arabia’s economic diversification strategies.
The company announced having $12.4 bn in free cash flow (FCF), short of its dividend commitment.
The current dividend position is based on Aramco’s IPO promise that it will issue $75 bn in dividends annually for five years.
Aramco is listed on the Saudi stock exchange Tadawul, making up the overwhelming majority of the total listing. Any doubts about Aramco’s future dividend and profitability will not only hit the value of the NOC but directly affect Tadawul.
A share price decline and lower Tadawul could result in a major domestic financial crisis, as Saudi nationals have been betting on share price increases.
Without a stable oil and gas sector, and without generating cash, the country will struggle to maintain its economic diversification efforts, and unemployment, already on the rise to near 16%, could spike.
Facing a fiscal gap of more than $11 billion in Q3, the Saudi government is cash strapped. Indications are that the fiscal gap has increased by 27% in 2020 compared to a year earlier.
Last month, the Saudi government stated that it expects a budget deficit close to 12% of GDP in 2020 and 5.1% of GDP in 2021 before balancing in 2023.
Aramco said it would distribute a dividend of $18.75 billion Q3, in line with its plan to pay a base dividend of $75 billion for 2020.
Saudi’s government owns 98.5% of the company, and the dividend provides about $75 bn annualized to the government.
Saudi Arabia has roughly 270 billion barrels of reserves, giving it a reserve life of 60 years.