Saudi Aramco Update

Saudi Aramco is taking advantage of rising oil prices to reduce leverage and invest in increased production capacity, bucking the trend to improve shareholder returns.

The state-backed oil company listed a small portion of its stock in 2019. Although its net profit almost quadrupled to US$25.5 billion, its dividend in the second quarter remained at US$18.8 billion. Oil prices rebounded to more than US$70 per barrel this quarter.

Analysts had previously expected net income for the quarter to be approximately US$24.7 billion.

Saudi Aramco CEO Amin Nasser said that although dividends may increase in the future, the world’s largest oil production company sees an opportunity to increase its maximum production capacity.

Many Western oil giants expect their own production to decline in the next 10 years, partly because of pressure from governments and investors to reduce emissions and increase investment in renewable energy.

“Seeing that there is a lot of underinvestment [oil] Supply this is a great opportunity for us,” Nasser said on Sunday. “We are working hard to increase production capacity. “

Nasser stated that the company has about two years to complete the planning and design phase of increasing its target production capacity from 12 million barrels per day to 13 million barrels per day, adding that he expects global oil demand to return to pre-pandemic levels next year 100 million barrels/day.

The company will invest approximately US$35 billion in capital expenditures this year, in line with previous guidelines, but compared with the same period in 2020, expenditures in the first half of this year have increased by approximately 15%.

Saudi Aramco’s largest shareholder is the Saudi Arabian government, which holds 98% of its shares. During the last year’s coronavirus pandemic, the company borrowed heavily to maintain its dividend. It is the kingdom’s main source of income, but there is basically no net debt at the beginning of 2020.

At the time of the cash crunch, the company was forced to absorb a majority stake in the Saudi chemical company Sabic from the Saudi public investment fund for US$69 billion, and its borrowing also increased last year.

Some analysts have warned that after BP and Royal Dutch Shell have increased investor returns in recent weeks, Saudi Aramco’s dividend yield may fall behind, dropping from about 5% of competitors to about 4%.

Saudi Aramco’s acting chief financial officer Ziad al-Murshed said on Sunday: “It is important to note that we maintained our dividend during the economic downturn last year.”

“Currently our dividends remain at normal levels in the second quarter, but again, we will advise later this year whether we will stick to the ordinary dividend or do more.”

Saudi Aramco defines the debt ratio as a measure of the extent to which operations are financed by debt. It soared from minus 4.9% in the first quarter of 2020 to 23% in December, and remained at that level in the first quarter of this year.

However, in the second quarter, the company reduced this level to 19.4%, which was mainly due to increased cash flow, including $12.4 billion in transactions Sold its shares in the pipeline system to a consortium of international investors.

Saudi Aramco has pledged to pay the government a majority of US$75 billion in dividends each year, as well as taxes and royalties, but it is also expected to lead a new domestic investment plan to modernize Saudi Arabia. This may limit its ability to distribute more cash to investors in the Tadawul exchange in Riyadh.

However, the rebound in oil prices has raised questions about whether there will be unexpected gains in the future. Due to the introduction of vaccines, advanced economies have begun to open up, boosting demand for fuel after a sharp drop last year.

Since April last year, restrictions on oil production by Saudi Arabia and its OPEC+ allies have also boosted crude oil prices, although they have begun to slow Add bucket As consumption picks up, it returns to the market.



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