Saudi Aramco, the world’s largest oil company, reported a 44% reduction in revenues in 2020. These losses were largely caused by COVID-demand destruction and lower oil prices. Saudi Arabia’s national oil company has had a rough year, attempting to re-establish itself as the world’s most important swing producer while dealing with a disastrous oil market and rising geopolitical threats. Despite the profit reduction, Saudi Arabia still outperformed all its independent competition, with Shell, BP, and ExxonMobil all reporting losses being forced to divest major oil and gas reserves. Aramco, it seems, remains optimistic, with CEO Amin Nasser expecting global oil demand to reach 99 million bpd at the end of 2021 and climb higher still in 2022. The oil giant is linking its future to Chinese oil demand, with Nasser confirming that Saudi Arabia will guarantee Chinese energy security to 2050.
The optimism coming from Saudi Aramco leadership does not appear entirely justified, especially with profits of only $49 billion in 2020. The company has been forced to cut its spending plans in 2021, which could hamper critical aspects of the oil giant’s future operations. With a CAPEX of roughly $35 billion for 2021, Aramco will be spending even less than the amount marked out in the company’s previous guidelines. The market expected a CAPEX of between $40-45 billion and will be disappointed with the additional drop. These negative developments stand in stark contrast to the “stubborn” position the oil giant has taken with regards to its dividends. Aramco has kept its $75 billion dividend payments in place for now, but those dividends will likely come under further pressure soon.
There are also some worrying developments that the market seems to be ignoring. When assessing the overall performance of international oil companies, analysts are increasingly worried about debt levels and investment volumes. The same prudent approach should be used by analysts when dealing with Aramco, as its profit margins or dividends seem to be fogging up analysis of its overall debt levels. In comparison to the 2019 level, the overall debt level of Aramco has almost quadrupled - a development that would normally act as a warning sign for investors and analysts. The profit margins of its upstream operations are still very attractive, but Aramco’s downstream has been struggling for years and the company continues to target major expansions.
The optimism currently shown by Aramco officials, especially its CEO Amin Nasser, can be partially explained by the fact Aramco is a direct instrument of Saudi Arabia’s national government. Nasser’s comments should be understood as coming from both the CEO of Aramco and from a representative of the Riyadh government. Optimism is required by the Saudi government as even a slight shift in sentiment from Saudi officials could threaten the stability of the global oil market. While plenty of analysts and media outlets were hailing a new “super-cycle of commodities” and hinting at the possibility of $100 oil, oil prices plunged again - highlighting the weakness of oil market fundamentals. As for Aramco officials linking Saudi Arabia’s future to China’s energy thirst or commodity intensity, the Kingdom should be wary of China’s aggressive transition away from oil.
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From an investor’s perspective, spreading risks at present should be a major concern for Aramco. Looking at the official statements being made, it seems Saudi Aramco is failing to diversify its risks sufficiently. To link its future directly to Chinese demand and economic growth appears to be a very risky move. The main question analysts should be asking is why there not a more risk-averse strategy from Saudi Aramco when it comes to China. Meanwhile, it seems that India, which in the future could surpass China when it comes to oil demand, is being ignored. Looking at the current investment strategies of Aramco, India is not a major priority for investment or JVs. One area where Saudi Aramco is diversifying is in its plans for blue hydrogen, which carries its own risk as an unproven energy source.
Despite a profitable year in 2020, the future is not at all bright for Aramco. The company appears to be ignoring geopolitical and economic threats while maintaining an unrealistic level of optimism. As a national oil company, Aramco is constrained by its geography and reserve potential. In contrast to major international oil companies, which have a vast and diverse reserve portfolio of basins, Aramco’s main producing areas are all in a very volatile region. When an international oil company is confronted by major unrest or threats to its production, such as Shell and ENI were in Nigeria, or BP was in Russia, investors will often flee. The increased targetting of Aramco infrastructure by Iranian militias in recent weeks is another warning that should be heeded. If Saudi Crown Prince Mohammed bin Salman’s statement that more shares of Aramco will be sold is true, then these risks simply must be dealt with. Internally, Aramco’s financials are still linked to the future of the Kingdom and its economic diversification strategies. The need for cash is high and yet dividends are seen as the main reason to invest in Aramco, so there could well be a time in which one or the other of those will need to be reduced.
The current optimism being shown by Aramco officials could quickly change due to lower demand and prices. At the same time, if Saudi Arabia wants to maintain its pivotal role in global oil markets then it will need to increase investments. There are certainly worrying signs for Aramco.
By Cyril Widdershoven for Oilprice.com
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