The world’s biggest oil company by production and market capitalization, Saudi Aramco, joined this week many of the international oil majors in reporting record second-quarter profits amid soaring oil and gas prices. Yet, the similarities between the Saudi state oil giant and Big Oil end with the record earnings this year.
Aramco, the world’s top crude oil exporter, is not your ordinary listed oil major. Its strategic choices and actions are not made in the board room or at shareholders’ meetings—they are made in the royal palaces in Riyadh and at OPEC and OPEC+ meetings. Saudi Aramco is the biggest cash cow for the Kingdom, generating billions of U.S. dollars in profits and cash flows, and distributing enormous dividends to shareholders, of which the biggest is, of course, Saudi Arabia with more than 95%.
Despite record earnings for the second quarter, Aramco did not raise dividends, nor did it initiate buyback programs as some of the international majors did. The Saudi firm didn’t boost its capital expenditure guidance for this year, either, despite reiterating its view that global oil demand will continue to grow through at least 2030.
According to The Wall Street Journal’s Rochelle Toplensky, Aramco’s actions (or rather, inaction, as it kept capex guidance unchanged) may suggest that the world’s largest oil firm could be hedging its bet on continuously growing oil demand over the next decade.
Saudi Aramco reported a net profit of $48.4 billion for the second quarter of the year, a record figure and a 90% increase on the year thanks to stronger oil prices. Free cash flow for the second quarter stood at $34.6 billion, and the figure for the first half of 2022 was $65.2 billion, Aramco said.
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“While global market volatility and economic uncertainty remain, events during the first half of this year support our view that ongoing investment in our industry is essential — both to help ensure markets remain well supplied and to facilitate an orderly energy transition,” Aramco CEO Amin Nasser said, reiterating the view that the Saudi giant has held for years – investment in the supply is not enough.
“In fact, we expect oil demand to continue to grow for the rest of the decade, despite downward economic pressures on short-term global forecasts,” the firm’s top executive added.
Despite record earnings, Aramco hasn’t announced a dividend increase (most of which goes to the Kingdom of Saudi Arabia), or any buybacks.
In its Q2 earnings release, Aramco said it “aims to deliver a sustainable and progressive dividend in line with future prospects and underlying financial results. The Board intends to review the dividend with the full year 2022 results in March 2023.”
Aramco expects capital expenditures to be on the lower end of its guidance of $40 billion to $50 billion in 2022, up from 2021 capex of $31.9 billion. The rise in capex so far this year was the result of higher upstream capital expenditures on drilling activities related to increasing the Maximum Sustainable Capacity, and development of unconventional projects, it said.
Aramco plans to have its capacity raised to 13 million barrels per day (bpd) by 2027, up from 12 million bpd now. The company will hit 13 million bpd, “after which the Kingdom will not have any additional capacity to increase production,” Saudi Crown Prince Mohammed bin Salman said in July at an Arab summit in Jeddah attended by U.S. President Joe Biden.
The policies and production of Saudi Aramco are decided by Saudi rulers and the Saudi strategy as part of the OPEC+ agreement. So, investors face high political and geopolitical risk in owning Aramco’s stock, which was clearly seen in the 2019 IPO in which large international investors weren’t really racing to buy shares in the world’s largest oil firm.
Aramco is often compared to Big Oil in terms of capex, cash flows, and profits, and it beats all of them due to the fact that it holds the rights to pump all the oil in Saudi Arabia. But Aramco is distinctly separate from the Big Oil club.
By Tsvetana Paraskova for Oilprice.com
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