Saudi Aramco’s First Quarter Profit Plunges 25%, But Dividend Payments Remain On Track

Saudi Aramco saw its first quarter net income tumble by 25% as collapsing demand for oil crushed crude prices.

The state-controlled energy behemoth reported first quarter profit of 62.5 billion riyals ($16.6 billion), down from 83.3 billion riyals ($22.2 billion) in the same period of 2019. The company said the profit plunge primarily reflected “lower crude oil prices, as well as declining refining and chemicals margins and inventory re-measurement losses.”

Aramco also said its free cash flow dropped to 56.3 billion riyals ($15 billion) in the first quarter, down from 65.1 billion riyals ($17.3 billion) in the same period last year.

However, Aramco also said it will still pay a dividend of $18.75 billion in the first quarter, despite the profit decline.

Prior to going public last year, Aramco had promised to pay out a $75 billion dividend annually for five years.

“The Covid-19 crisis is unlike anything the world has experienced in recent history and we are adapting to a highly complex and rapidly changing business environment,” said Aramco President and CEO Amin Nasser. “Aramco has demonstrated resilience during economic cycles and has an unparalleled position due to a strong balance sheet and low-cost structure.”

Nasser added: “We retain significant flexibility to adjust expenditures and have considerable experience in managing the business through times of adversity.”

Brent crude, the international benchmark, has plunged more than half this year – as of Tuesday morning, it traded just above $30 per barrel. ( Saudi Arabia needs an oil price of $76 per barrel in order to balance its budget this year, according to the International Monetary Fund .)

“On the balance sheet, Aramco continues to maintain its strength despite the reduction in oil prices,” said Mazen Alsudairi, head of research at Al Rajhi Capital in Riyadh.

Aramco said it expects to make between $25 billion and $30 billion in capital expenditures this year but added that its spending plans for 2021 are under review.

On Monday, Saudi Arabia said it would further cut its oil production by one million barrels per day in June to support crude markets. In April, OPEC and non-OPEC producers agreed to cuts totaling 9.7 million barrels per day. As a result, the Saudis will deliver 7.5 million barrels a day starting in June – an 18-year low.

Also on Monday, the kingdom’s government tripled its value-added tax and reduce state workers’ cost of living allowances as it seeks to cut spending to deal with falling revenues.

Ellen Wald, president of Transversal Consulting, noted that Aramco’s first quarter results did not even include the worst of the crude oil-pandemic crisis.

“Now we have to remember that [first quarter] financials really only include about three weeks of this current oil crisis,” she said. “So it doesn’t include the month of April where Aramco overproduced in order to try to shore up revenue… Based on what we’ve seen from other oil majors like Exxon in previous weeks, we can expect a big [profit] drop [in the second quarter]… That will be indicative of what’s to come in the second quarter where we’re going to start to see the full effects of the demand crisis and the demand shock on Aramco.”

Biraj Borkhataria and Erwan Keroureda, energy analysts at Royal Bank of Canada, similarly agreed: “Clearly, Aramco’s financial metrics will deteriorate significantly in the second quarter, like its peers.”

Aramco’s vow to pay dividends stands in stark contrast to other major oil companies like Exxon Mobil Corp. (XOM) and Royal Dutch Shell (RDS-A) which have either cut or suspended their dividend payments.

“Effectively, Aramco would be borrowing to pay its dividend, which cannot be sustainable in the long term,” said AllianceBernstein analysts Neil Beveridge and Oswald Clint.

Aside from the huge dividend, Aramco also still plans to make the first installment of its $69 billion purchase of a 70% stake in chemicals maker Saudi Basic Industries Corp. (SABIC) from the kingdom’s sovereign wealth fund.

However payments for the deal are reportedly expected to be restructured.

Yousef Husseini, an analyst EFG Hermes in Egypt, said he expects Aramco to eventually reduce the dividend it pays to the Saudi government, the company’s biggest shareholder by far.

“They will cut the [dividend] share of the government in the second quarter but there is some upside if they renegotiate the SABIC deal which could save them some cash flow,” he said.

Aramco chief Nasser concluded: “Looking ahead to the remainder of 2020, we expect the impact of the Covid-19 pandemic on global energy demand and oil prices to weigh on our earnings. We continue to reinforce the business during this period by reducing our capex and driving operational excellence. Longer term we remain confident that demand for energy will rebound as global economies recover.”