Aramco’s profits are more than enough to fund Saudi Arabia

Aramco

Saudi Aramco’s first-quarter results released on Tuesday contained no great surprises. What is significant is what it is doing with its continuing cash haul. 

Its choices are to invest in the upstream oil, gas and downstream businesses, to venture into low-carbon ventures such as hydrogen, or to pay more to its shareholders – of whom the Saudi government and sovereign wealth funds account for 98 percent.

Aramco’s profits were 19 percent lower than a year earlier, at $31.9 billion. Earnings were pretty much in line with expectations, given the 17 percent drop in its realised oil prices over this period. 

• Aramco profits drop 19% to $31.9bn in Q1
• Saudi transfers 4% stake in Aramco to PIF subsidiary
• Aramco reports record 2022 profit at $161bn on higher prices

Strong cashflow and the repayment of debt from its acquisition of petrochemical compatriot Sabic meant that net gearing – the ratio of debt to equity – dropped to minus 10.3 percent from minus 7.9 percent.

Capital expenditure was moderately higher. Nevertheless, Aramco managed to record a slight increase in free cashflow, and kept its base dividend unchanged after raising it four percent in March. 

On top, it will introduce a performance-based dividend of 50-70 percent of annual free cashflow, after the base dividend and external investments – a commitment resembling that made by several American oil corporations.

The increased dividend from the fourth quarter of last year raises the yield to about 4 percent, closer to that of Western peers such as Shell. 

But, more importantly, it helped the Saudi government’s overall take, including royalties and taxes, decrease only 3 percent to $47 billion despite the oil price drop – a welcome bounty as the kingdom attempts to fund its economic diversification drive. The state oil firm pays by far the most money in dividends of any listed company worldwide.

Aramco has five main strategic imperatives.

First, it continues to expand its maximum sustainable oil production capacity towards 13 million barrels per day (bpd) by 2027. The upstream accounts for more than 90 percent of Aramco’s profits, the bulk of that from oil, yet received almost no comments in these results.

Second, it is growing its gas business, including development of the giant Jafurah unconventional resource, as part of shifting the Saudi electricity sector from burning oil. It also continues to look into international liquefied natural gas (LNG) opportunities, including in the US and Australia. The only two upstream projects specifically discussed in its latest update are both for domestic gas.

Third, it continues to expand its downstream activities, particularly internationally. Aramco has since at least 1988 sought to develop direct stakes in outlets for its crude, firstly in the US with Motiva, whose trading arm it acquired in January, then more recently in China and other key Asian markets. This has become more urgent given the intensified competition with discounted Russian oil.

This quarter it paid about $2.8 billion for the international oil products business of Valvoline, which concentrates on lubricants.

It agreed to set up a 300,000 bpd refinery and petrochemical complex in Liaoning Province, China, and to acquire 10 percent of Chinese company Rongsheng Petrochemical for $3.6 billion. And it began building a $7 billion steam cracker through S-Oil, its South Korean affiliate. The equivalent of 45 percent of Aramco’s crude oil output now goes into its downstream operations. 

Fourth, it supports the diversification of the Saudi economy and the “in-kingdom total value-add” programme. Earlier in May, it agreed with Baosteel, a leading Chinese company, to construct a factory to make steel plate in the industrial zone of Ras Al Khair.

And fifth, it seeks to decarbonise and to create low-carbon energy exports, most prominently through hydrogen and its derivative, ammonia.

Yet CEO Amin Nasser told analysts that Aramco was finding it difficult to reach offtake agreements for blue hydrogen with European buyers because of its high cost, which he put at $250 per barrel of oil equivalent.

He suggested that if offtakers were not found the company could use the gas from its unconventional Jafurah development for domestic use or liquefied natural gas exports.

Nevertheless, he maintained “we are on track for the first increment in blue hydrogen … approximately 1 bcfd [billion cubic feet per day] of sales gas”. Aramco later issued a clarification that its goal to produce 11 million tonnes of blue ammonia annually by 2030 had not changed.

For now, relatively strong oil prices means Aramco can continue its generous payouts and sustain capital spending. Some of its more ambitious crude-to-chemicals plans have been shelved for now, saving capital commitments. 

Its negative net debt gives it plenty of financial headroom to borrow before it would hit its targeted gearing of 5-15 percent.

If it needed further funds for projects it could bring in partners – it is already said to be talking to TotalEnergies of France and China’s state-owned Sinopec about investing in Jafurah, to raise about $10 billion out of the ultimately required $100 billion. 

It has also been working on an initial public offering of its oil trading unit, which could be valued at $30 billion, but has slowed this while waiting for better market conditions.

If oil prices fell further and stayed low, Aramco may need to think again. For now, it can fund its plans and maintain its huge payouts, especially to the dominant shareholder.

Robin Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis