Saudi Aramco, the world’s largest oil and gas company, will present its 2020 financial results on Sunday, March 21. Considering the turbulence and volatility of 2020, Aramco’s results may reveal some of the trends to be observed in the next decade in the oil industry. The impact of COVID-19, the immense destruction of demand, the high volatility in oil prices and the continuing weak demand are factors to be considered when evaluating the next Aramco figures. As a semi-listed national oil company, Aramco has the largest company-based oil reserves on the planet, estimated at around 276 billion barrels of oil. The financial results reported by the five integrated supermajors – ExxonMobil, BP, Shell, Chevron and Total – may lead some to expect weak results from Aramco. Among them, the oil giants recorded a combined record loss of $ 76 billion in 2020. While most of that loss was caused by asset losses and write-offs, estimated at about $ 69 billion, the real concern for shareholders have been net losses ExxonMobil reported a loss of $ 22.4 billion, Shell and BP reported a loss of more than $ 20 billion and Total and Chevron reported net losses of $ 5 billion to US $ 6 billion. The cost of the global energy transition and the immense pressure to reassess the value of existing reserves or to divest large parts of operating assets has hit these companies hard.
These developments, however, are not a problem that Aramco will have to deal with, as the national oil company is not yet adjusting its reserves or divesting its international operating assets. While the Saudi giant is readjusting its general operations to deal with the global energy transition by going full force on hydrogen and unconventional ones, it still plans to produce every barrel of oil it can. As a national oil company, Aramco does not have to bow to activist investors or short-term trends. This means that oil and gas will continue to be the main generators of revenue in the coming decades.
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The most interesting parts of Aramco’s financial report will be the possible changes in its budget, as it has already reduced its CAPEX budget and some important projects have been delayed. Global oil prices have rebounded widely this year, so some analysts are optimistic about Aramco’s short-term future. However, realistically, despite being in a league of its own when it comes to production and idle capacity, current CAPEX cuts and postponement of major programs are likely to be prolonged. Several major international projects have already been halted, such as India’s downstream, but Aramco will need to keep production in place and possibly even increase spare production capacity to contain possible growth in demand in 2022. Aramco’s CEO, Amin Nasser, has already indicated that it is cautiously optimistic about global oil markets, with growth expected in 2022.
Expectations, based on the first three quarters of 2020, are that Aramco’s FY2020 numbers will be lower than in 2019. In the third quarter of 2020, Aramco reported a 44.6% profit decline to $ 11 , 79 billion, compared to $ 21.29 billion in the third quarter of 2019. The company has also reduced its CAPEX 2020 budget to less than $ 25 billion, which is considered a critical level when considering the investment needed to contain the decline in production. Some analysts expect similar CAPEX budgets for 2021, which would undermine the current bullish sentiment in the oil market.
In the short term, it will be Aramco’s net profit and its overall margins that will drive the markets. As the largest oil producer in the world and the main power of the OPEC + agreement, Aramco’s financial stability is an important indicator of the stability of Saudi Arabia and the largest oil market. As the main generator of government revenue, the stress on Aramco’s finances is immense. Saudi investors and government officials will be very cautious about any potential negative news. They will also be concerned if Aramco’s finances are not healthy enough to handle the company’s CAPEX / OPEX needs and, at the same time, pay $ 75 billion in dividends. If revenues are very low, the dividend issue may start to destabilize the company’s future, since cutting CAPEX further would be viewed in a very negative way. A potential expansion of production capacity, as requested in March 2020 by the Saudi government, has not yet been implemented due to low oil prices and CAPEX cuts. New production expansions, such as Marjan, Berri, Safaniya and Zuluf, have been postponed, while offshore opportunities in the Red Sea are still frozen. Aramco’s figures will indicate how strong the oil giant’s position is today and whether its production capacity is about to come under pressure.
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At the same time, analysts will be watching closely any mention by Saudi Aramco officials of the ongoing escalation of the Yemen crisis. The rise in drone attacks combined with the new long-range missile capabilities of the Houthis and other Iranian proxies poses a major threat to Aramco. Not only is the escalation of the Yemeni conflict a major threat to stability in the region, but also to Aramco’s attractiveness and stability. If a combined drone missile strategy is put in place, supported by Iran or other forces in the region, Aramco’s oil production and export capacity will be severely hampered.
Weaker financial results, Riyadh demanding a higher percentage of revenues, continued instability in the region and low oil prices are not a cocktail that will attract new investors or financial institutions. Aramco’s management and the Ministry of Healthy Energy will be under pressure to convince markets that Aramco remains strong.
The financial world will be watching on Sunday when the company’s financial results are released. Attempts by Saudi officials to highlight substantial changes in the company’s management, large investments in blockchain, hydrogen and even unconventional energy are unlikely to be enough to contain growing concern among analysts. Investors and traders will remain painfully aware that Aramco’s future is directly linked to Saudi Arabia’s future. Negative financial reports or assessments will have a tangible impact on the Kingdom itself. Fortunately for Saudi entities, the world, even oil traders and hedge funds, are looking for stability at the moment. This sentiment may mean that Aramco’s potentially negative report will be viewed in a more positive light. Whatever the outcome, one thing is certain, all eyes will be on Aramco this Sunday.
By Cyril Widdershoven for Oilprice.com
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