Driven by the rebound in oil and chemical prices, Saudi Aramco followed its large oil rivals and gained substantial profits.

The world’s largest energy company’s net income in the second quarter was 95.5 billion riyals (25.5 billion U.S. dollars), the highest level since the end of 2018. Free cash flow increased to US$22.6 billion, higher than the state-owned holding company’s quarterly dividend of US$18.8 billion for the first time since the coronavirus pandemic.

The reopening of major economies has triggered a surge in commodity prices, and crude oil prices have risen by about 35% this year. In the past two weeks, oil companies such as BP, Chevron and Royal Dutch Shell have stated that they will increase share repurchases and dividends. It is believed that the worst period of the epidemic has passed.

Chief Executive Amin Nasser said in a statement on Sunday that the results “reflect a strong rebound in global energy demand, and as the global recovery strengthens, we will be more resilient and flexible in the second half of 2022. “I am still very optimistic about the second half of 2022 and beyond.”

However, Nasser later said in a conference call with reporters that the pandemic was “obviously far from over.” Oil has just experienced its worst week since October, as the spread of delta variables, especially in China, cast a shadow over the short-term outlook. Brent crude oil fell 7% to US$70.70 per barrel.

Nasser said that global oil demand is still below the level before the outbreak, but it should reach a near-record high of 100 million barrels per day next year.

Debt reduction

Saudi Aramco’s debt ratio, which measures the ratio of net debt to equity, fell from 23% at the end of 2020 to 19.4%, but it is still higher than the 15% upper limit preferred by management. As cash flow increased and the Dhahran-based company used part of the proceeds from the sale of its oil pipeline shares to repay debt, it declined. In June, a consortium led by Saudi Aramco and the US group EIG Global Energy Partners LLC completed a $12.4 billion transaction.

The capital expenditure in the first half of this year was US$15.7 billion, and Saudi Aramco expects the full-year capital expenditure of 2022 to be approximately US$35 billion, in line with previous guidance.

Part of the funds will be used to increase the daily output of crude oil from 12 million barrels to 13 million barrels.

“We see less investment from other manufacturers around the world, which creates opportunities,” Nasser said.

With current capital expenditure levels and oil prices, most analysts expect Saudi Aramco will be able to use free cash flow to pay its dividend promises. Those at Bank of America even suggested that now that Occidental Petroleum is improving shareholder returns, Saudi Aramco needs to increase spending to remain competitive.

Saudi Aramco’s chief financial officer Ziad al-Murshed said on the same conference call: “We will make recommendations later this year whether to stick to the ordinary dividend or other methods.”

Trust transaction

Saudi Aramco said it is continuing to conduct due diligence on the proposed investment in Reliance Industries Ltd.’s petrochemical refining business. In 2019, Saudi Aramco had discussed buying a 20% stake at a price of approximately US$15 billion, but the transaction was postponed due to the pandemic. India’s Reliance said in June that it should be finalized this year.

The Saudi company said in a more detailed financial statement released on Monday that its upstream business mainly includes oil and gas production, and its pre-interest and tax profit increased to 45.3 billion U.S. dollars from April to June. This is an increase of 208% over the previous year and an increase of 13% over the first quarter.

Crude oil production has been hampered by Saudi Arabia’s OPEC commitments since last year, with an average of 8.6 million barrels per day.

Chemical promotion

The Organization of Petroleum Exporting Countries and its allies-OPEC+, an organization of 23 countries-began unprecedented supply restrictions after the pandemic began to boost prices. Saudi Arabia, the de facto leader of the cartel, along with Russia, implemented additional restrictions on the basis of OPEC’s requirements, although these restrictions will end this quarter.

Saudi Aramco’s downstream division achieved an EBIT of US$4.6 billion in the second quarter, higher than the loss in the same period in 2020. This is due to the high profit margins of refined products and the contribution of Saudi Basic Industries, a chemical company acquired by Saudi Aramco, which controlled US$69 billion last year. Due to the surge in demand for plastics, paint and packaging, Saudi Basic Industries Corporation (Aramco), which holds 70% of its shares, reported its best performance in nearly a decade last week.

Saudi Aramco will hold an investor conference call on Monday. Its share price rose 0.3% to 35.15 riyals in Riyadh on Sunday.

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