Opec’s output curbs pay off for Saudi Aramco as quarterly profit soars

Dubai/Riyadh — Saudi Aramco followed its Big Oil competitors with bumper earnings, boosted by a recovery in oil and chemical prices.

The world’s biggest energy company made net income of 95.5-billion riyals ($25.5bn) in the second quarter, the highest level since the end of 2018. Free cash flow rose to $22.6bn, above the state-controlled firm’s quarterly dividend of $18.8bn for the first time since the start of the coronavirus pandemic.

The reopening of major economies has triggered a surge in commodity prices, with crude up about 35% in 2021. In the past two weeks, oil companies such as BP, Chevron and Royal Dutch Shell have said they will increase share buybacks and payouts, confident the worst of the pandemic is over.

Aramco’s annual dividend of $75bn, the world’s largest, is a crucial source of funding for Saudi Arabia. The government, which owns 98% of the company, is trying to narrow a budget deficit that ballooned last year as energy prices tanked with the spread of the virus.

The results “reflect a strong rebound in worldwide energy demand and we are heading into the second half of 2021 more resilient and more flexible, as the global recovery gains momentum”, CEO Amin Nasser said in a statement on Sunday. “I remain extremely positive about the second half of 2021 and beyond.”

Still, the pandemic is “clearly far from over”, Nasser said later on a call with reporters. Oil just had its worst week since October as the spread of the Delta variant, especially in China, clouds the short-term outlook. Brent crude fell 7% to $70.70 a barrel.

Global oil demand remains below pre-Covid-19 levels, but should reach a near record high of 100-million barrels a day in 2022, Nasser said.

Debt declines

Aramco’s gearing, a measure of net debt to equity, fell to 19.4% from 23% at the end of 2020, though it remains above management’s preferred cap of 15%. It declined thanks to higher cash flow and the Dhahran-based firm using some proceeds from the sale of a stake in its oil pipelines to pay down debt. In June, Aramco completed the $12.4bn deal with a consortium led by US group EIG Global Energy Partners.

Capital expenditure was $15.7bn in the first half of the year and Aramco expects it to be about $35bn for all of 2021, in line with earlier guidance. Part of that money will go towards boosting daily crude production capacity to 13-million barrels from 12- million.

“With less investment that we see from other producers globally, this creates an opportunity,” Nasser said.

At current capex levels and oil prices, most analysts expect Aramco will be able to cover its dividend commitment with free cash flow. Those at Bank of America even suggested the payout needs to be raised for Aramco to stay competitive now that Western oil firms are hiking shareholder returns.

“We’ll advise later this year whether we’ll be sticking to the ordinary dividend or doing otherwise,” Aramco CFO Ziad al-Murshed said.

Aramco is continuing to do due diligence on a proposed investment in Reliance Industries’s oil-to-chemicals refining business, it said. In 2019, Aramco discussed buying a 20% stake for about $15bn, but the deal was delayed by the pandemic. It should be finalised this year, India’s Reliance said in June.

The Saudi firm’s upstream business, mainly consisting of oil and gas production, saw earnings before interest and tax rise to $45.3bn between April and June, it said in a more detailed financial statement released on Monday. That was an increase of 208% from the previous year and 13% from the first quarter.

Crude oil production, which has been held back since 2020 by Saudi Arabia’s Opec commitments, averaged 8.6-million barrels a day.

Chemicals boost

Opec and its allies — a 23-nation grouping known as Opec+ -began unprecedented supply restrictions to bolster prices after the onset of the pandemic. Saudi Arabia, the cartel’s de facto leader along with Russia, implemented extra curbs on top of what Opec required, though those are meant to end this quarter.

Aramco’s downstream unit made a $4.6bn profit before interest and tax in the second quarter, up from a loss in the same period of 2020. It was helped by high margins on refined products and contributions from Saudi Basic Industries Corporation (Sabic), a chemicals firm that Aramco took control of last year for $69bn. Sabic, of which Aramco owns 70%, reported its best results in almost a decade last week as demand for plastics, paint and packaging booms.

Aramco’s stock price rose 0.3% to 35.15 riyals in Riyadh on Sunday.

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