Saudi Aramco prepares for tough year after major income hit

Saudi Aramco, the world’s most profitable company, took a major income hit in 2019 and is preparing for an even tougher fiscal year that will be heavily influenced by the coronavirus pandemic and an oil price war between Riyadh and Moscow.

In the first earnings report following its sale of 1.7% of the company, Saudi Aramco revealed its net profit fell 21% in 2019 to 330.69 billion riyals ($88.1 billion) from 2018’s net income of $111.1 billion. Despite the earnings drop, Saudi Aramco retained the title of the world’s most profitable company, surpassing technology behemoth Apple Incorporated, which recorded a net profit of $55 billion in its latest financial year.

In releasing its earnings report March 15, the Saudi state oil and gas conglomerate said it would reduce spending in 2020 in response to a lower oil price environment but would increase cash dividends. The latter move is interpreted as a gesture to appease disgruntled individual shareholders who have seen the value of Saudi Aramco shares collapse in recent weeks.

Saudi Aramco described 2019 as an “exceptional” year involving a “difficult macroeconomic environment.” The company attributed the net income drop to lower crude prices and reduced production volumes associated with OPEC+ agreements as well as declining refining and chemical margins and a $1.6 billion charge involving subsidiary Sadara Chemical Company. The Saudi state energy giant reported net revenues for 2019 at $294.9 billion, down 8% from 2018 net revenues.

Saudi Aramco said it would reduce its capital expenditures for 2020 to $25 billion-$30 billion from 2019’s $32.8 billion spending levels because of poor market conditions resulting from the coronavirus outbreak reducing global demand and “recent commodity price volatility.”

Saudi Aramco President and CEO Amin Nasser stated: “The recent COVID-19 outbreak and its rapid spread illustrate the importance of agility and adaptability in an ever-changing global landscape… In fact, we have already taken steps to rationalise our planned 2020 capital spending.”

The Saudi state energy firm paid out $73.2 billion in dividends for 2019, of which some $3.9 billion was dedicated to retail investors who bought shares in Saudi Aramco’s initial public offering (IPO). Saudi Aramco garnered $29.4 billion from that sale — an initial $25.6 billion from the 1.5% IPO in December and an additional $3.8 billion when it activated its “greenshoe” purchasing option a month later. The company said it plans to pay $75 billion in dividends this year.

Crude prices have tumbled more than 60% since a peak in early January when geopolitical events involving the United States and Iran pushed up prices of benchmark crudes US West Texas Intermediate (WTI) and UK Brent to $65-$72 a barrel.

Oil markets began taking notice of the growing effects that the rapidly spreading coronavirus was having on Chinese demand by early February and prices further dropped as the virus spread to other continents and global demand weakened.

Expectations of continued cooperation between the OPEC+ members to shore up prices were dashed March 6 when Russia refused to sign on to a Saudi-led proposal to reduce collective output by an additional 1.5 million barrels per day (bpd) and declared that all OPEC+ members were free to produce at whatever levels they wanted beginning April 1.

Saudi Aramco’s retaliatory response to Moscow’s abrupt rejection was to slash its official oil selling prices to key markets and commit to opening its crude floodgates. Saudi Aramco claimed that it would hike production from recent levels of 9.7 million bpd to 12.3 million bpd in April.

The Saudi Press Agency reiterated that pledge, stating on March 18 that “[Saudi] Ministry of Energy directed Saudi Aramco to continue to supply crude oil at a level of 12.3 million bpd over the coming months.” Riyadh hopes to push its crude exports from current levels of 7 million bpd to more than 10 million bpd in May, believing it will profit by its higher output offsetting the lower oil prices.

The Saudi sabre-rattling and coronavirus-led recession concerns sent the price of WTI tumbling 24% on March 18 to $20.37 a barrel, reaching its lowest level since February 2002. The price of Brent sank 13% on the same day to $24.88 a barrel, a level last seen in May 2003.

Not surprisingly, the Saudi Aramco share price has taken a battering as crude prices suffered. News of the Saudi-Russian spat saw the share price of Saudi Aramco on the domestic exchange, the Tadawul, close below its $8.53 IPO share price for the first time since the December 11 listing, at $8 a share on March 8. The company’s shares closed below the IPO share price in subsequent days of trading, recently as low as $7.73 a share.

The company’s market capitalisation reportedly has fallen by $320 billion to $1.44 trillion in the aftermath of the Russian and Saudi moves.