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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Aramco’s Earnings: It May Get Worse

  • 65 percent of Aramco’s net income in Q2 went on a debt to shareholders, in the form of dividends.
  • Aramco’s ill-conceived IPO has put a large burden on the company to pay higher dividends than normal
  • The highly precarious financial tightrope on which Aramco finds itself also means that Saudi Arabia has no alternative but to keep pushing oil prices ever higher.

Three numbers encapsulate the story of Saudi Aramco since its initial public offering (IPO) in December 2019. The first is that its net income for the second quarter (Q2) of this year was US$30.1 billion. The second is that its regular quarterly dividend was US$19.5 billion. And the third is that on top of this regular dividend, it will also start paying an additional promised performance-linked dividend of US$9.9 billion in the next quarter. So, even with a Brent oil price averaging around US$80 per barrel (pb) in Q2 – an historically elevated price for ‘non-crisis’ oil markets in recent years - 65 percent of its net income went on a debt to shareholders, in the form of dividends. If the net income stayed the same in Q3, this debt payment would rise to 98 percent. The story is, then, that due to the ill-conceived IPO thought up in late 2015/early 2016 by Crown Prince Mohammed bin Salman (MbS), Saudi Arabia’s corporate crown jewel must continue to operate under a crushing debt burden. Because of that, it is limited in the new exploration and development work it can do, which cripples its ability to increase its reserves and its production numbers. Because of that, it will keep having to act as the instrument through which Saudi Arabia continues to push oil (and gas) prices higher. And because of that, the U.S. at some point will fully enact the ‘No Oil Producing and Exporting Cartels’ (NOPEC) bill and destroy Saudi Aramco as we know it today. 

It should be remembered that back in late 2015/early 2016, MbS conceived the plan to IPO Aramco as a key part of his strategy to take over the position of heir-designate to King Salman from Prince Muhammad bin Nayef (MbN). In theory, the idea had several positive factors going for it that would benefit MbS. First, it could raise a lot of money, part of which might be used to offset the economically disastrous effect on Saudi Arabia of the 2014-2016 Oil Price War, as analysed in my new book on the new global oil market order. Second, it could boost Saudi Arabia’s reputation in the global financial markets, which would help with further IPOs and would boost foreign investment into the country’s domestic capital markets more broadly. And third, both new funding flows could be used as part of the ‘National Transformation Program’ 2020 - in turn part of Saudi’s ‘Vision 2030’ development plan – that sought to diversify the Kingdom’s economy away from its reliance on oil and gas exports. After a few months of further discussion, MbS assured senior Saudis that he could absolutely ensure the flotation of 5 percent of Aramco, which he said would absolutely raise at least US$100 billion in much-needed funds for Saudi Arabia. This, in turn, would place a valuation on the entire company of at least US$2 trillion. In addition, MbS said, Saudi Aramco would absolutely be listed on one of the world’s major stock exchanges, with the New York Stock Exchange and the London Stock Exchange being the two preferred options.

Related: Sudan Oil Exports Rising Despite Conflict

This theory ran into practical difficulties from the moment that major Western investors began to look at Aramco in more depth. For a start, the crude oil production figures that Saudi Arabia had long bandied around as being fact were evidently no such thing, as forensically analysed in my new book. Far from being able to produce 10, 11 or 12 or more million barrels per day (bpd), Saudi Arabia struggled to produce anything over 9 million bpd. To be accurate: from 1 January 1973 to Monday 14 August 2023, Saudi Arabia’s average crude oil production is 8.257 million bpd. This means that its equally much-vaunted spare capacity of around 2 million bpd is also not true, founded as it is on a false baseline crude oil production capability. Additionally concerning then, as now, were Saudi Arabia’s equally fantastical claims about its oil reserves. Specifically, at the beginning of 1989, the country claimed proven oil reserves of 170 billion barrels. Just one year later, and without the discovery of any major new oil fields, it claimed proven oil reserves of 257 billion barrels, an increase of 51.2 percent. Shortly afterwards, Saudi Arabia’s proven oil reserves miraculously increased again, this time to just over 266 billion barrels, again without the discovery of any major new oil fields. Proven oil reserves increased once more in 2017, to 268.5 billion barrels, again with no new major oil finds being discovered. At the same time as these increases being announced, the country was extracting an average of 8.162 million bpd. Therefore, from 1990 (the year in which Saudi Arabia’s claimed proven oil reserves jumped from 170 billion barrels to 257 billion barrels), to 2017 (the year when Saudi Arabia was claiming proven oil reserves of 268.5 billion barrels), Saudi Arabia had physically removed from the ground forever an average of just over 2.979 billion barrels of crude oil every year. The total amount of crude oil permanently removed from the beginning of 1990 to the beginning of 2017, was, then, 80.43 billion barrels. In short, from 1990 to 2017, Saudi Arabia’s official crude oil reserves number had gone up 98.5 billion barrels, despite there being no new oil finds and it physically removing 80.43 barrels forever. 

These facts - together with Aramco being used as a key source of funding for various socio-economic projects that had nothing to do with its business and would destroy shareholder value – meant that no major global financial players wanted to invest in Aramco and not a single major Western or Eastern stock market wanted Aramco to list on it. Given this, the stage was set for a series of events that help to define the new global oil market order, as also analysed in depth in my new book on that subject. One of these was a face-saving offer for MbS from China that he has never forgotten and that has underpinned Saudi Arabia’s drift towards China since then. Another was the expediting of Saudi Arabia’s move away from the U.S. and towards Russia that had been gathering pace since the end of the Second Oil Price War in 2016. Even more specifically for Saudi Aramco, it meant that MbS had to offer massive incentives to investors to buy any of the IPO. One of these was a guarantee by the Saudi government that, whatever happened, it would pay a US$75 billion dividend payment in 2020, split equally into payments of US$18.75 billion every quarter. These payments, of course, have now risen and will be made even more destructive to Aramco’s basic functioning by the addition of extra performance-linked dividends. These are designed to target 50-70 percent of annual free cash flow, net of the base dividend, and other amounts including external investments, according to Aramco’s chief executive officer, Amin Nasser.

The highly precarious financial tightrope on which Aramco finds itself also means that Saudi Arabia has no alternative but to keep pushing oil (and gas) prices ever higher. And, as day follows night, this means a collision course with the U.S. and its allies, who regard rising energy prices as direct threats to their economic and political well-being. This comes on top of an increasingly antagonistic relationship between the U.S. and Saudi Arabia, following the de facto break-up of their foundation stone 1945 agreement. The mechanism to destroy Aramco in its current form is already in place, in the form of the NOPEC bill, as also analysed in my new book. This legislation would open the way for sovereign governments to be sued for predatory pricing and any failure to comply with the U.S.’s antitrust laws. OPEC is a de facto cartel, Saudi Arabia is its de facto leader, and Saudi Aramco is Saudi Arabia’s key oil company. The enactment of NOPEC would mean that trading in all Saudi Aramco’s products – including oil – would be subject to the antitrust legislation, meaning the prohibition of sales in U.S. dollars. It would also mean the eventual break-up of Aramco into smaller constituent companies that are not capable of influencing the oil price.

By Simon Watkins for Oilprice.com

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