Saudi Arabia, the largest oil and gas company in the world, will present its financial results for 2020 on Sunday, March 21st. Due to the turmoil and volatility of 2020, Aramco’s results may show some trends that need to be watched in the oil industry over the next decade. The impact of COVID-19, huge demand destruction, high volatility in oil prices and continued weak demand are all things to consider when evaluating upcoming Aramco figures. As a semi-listed national oil company, Aramco has the largest oil reserves on the company, which is estimated to be roughly 276 billion barrels. The financial results reported by the five integrated supermasters – ExxonMobil, BP, Shell, Chevron and Total – may lead some Aramco to expect poor results. Between them, the oil giants achieved a combined record loss of $ 76 billion in 2020. Although the bulk of the loss was caused by asset impairment losses and write-downs, estimated at about $ 69 billion, net losses, with ExxonMobil reporting a loss of $ 22.4 billion, Shell and BP having a loss of more reported as $ 20 billion, and Total and Chevron reported net losses of $ 5 to $ 6 billion. The cost of the global energy transition and the tremendous pressure to reassess the value of existing reserves or to sell large portions of current assets has hit these companies hard.
However, these developments are not a problem facing Aramco, as the national oil company has not yet adjusted its reserves or sold its international current assets. While the Saudi giant is adjusting its overall operations to tackle the global energy transition by engaging in hydrogen and unconventional power, it still intends 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 be the most important income for decades to come.
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The most interesting parts of Aramco’s financial report are the possible changes in its budget, as it has already reduced its CAPEX budget and some major projects have been delayed. However, global oil prices have recovered greatly this year, so some analysts are optimistic about Aramco’s future. Realistically, although the current CAPEX cuts and postponements of major programs are likely to be extended, even though he is in a league in terms of production and free capacity. Several major international projects have already been halted, such as downstream in India, but Aramco will have to keep production and possibly even increase free production capacity to counteract the potential growth in demand in 2022. Amin Nasser, CEO of Aramco, has already indicated that he is cautiously optimistic about global oil markets and expects growth in 2022.
The expectations, based on the first three quarters of 2020, are that Aramco’s FY2020 figures will be lower than in 2019. In Q3 2020, Aramco reported a 44.6% profit decline to $ 11.79 billion, compared to $ 21.29 billion in Q3 2019. The company has also reduced its CAPEX 2020 budget to less than $ 25 billion, which is considered a critical level if the investment is taken into account to counter production decline. Some analysts expect similar CAPEX budgets for 2021, which will hurt the current strong sentiment in the oil market.
In the short term, it will be Aramco’s net profit and its overall margins that drive markets. As the largest oil producer in the world and the most important force in the OPEC + agreement, Aramco’s financial stability is an important indicator of the stability of Saudi Arabia and the larger oil market. As the main government revenue, the strain on Aramco’s finances is enormous. Investors as well as Saudi government officials will be very wary of the possible negative news. They will also be concerned if Aramco’s finances are not sound enough to meet CAPEX / OPEX needs, while also paying out $ 75 billion in dividends. If the income is very low, the dividend issue may start to destabilize the future of the company, as CAPEX will further be seen in a very negative light. A potential expansion of production capacity, as ordered by the Saudi government in March 2020, has not yet been implemented due to low oil prices and CAPEX reductions. New production expansions, such as Marjan, Berri, Safaniya and Zuluf, have been delayed, while opportunities in the Red Sea abroad are still on ice. Aramco’s figures will indicate how strong the oil giant’s position is currently and whether its production capacity is about to come under pressure.
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At the same time, analysts will be keeping a close eye on any mention of Saudi Aramco officials about the continuing increase in the Yemen crisis. Increased drone strikes combined with the new long-range missile capabilities of the Houthis and other Iranian delegates pose a major threat to Aramco. Not only is the growing Yemeni conflict a major threat to the stability of the region, but also to the attractiveness and stability of Aramco. If a joint drone missile strategy is put in place, supported by Iran or other forces in the region, Aramco’s oil production and export capabilities will be severely hampered.
Weaker financial results, Riyadh demands a higher percentage of income, continued instability in the region and low oil prices are not a cocktail that will attract new investors or financial institutions. The management of Aramco and the Saudi Ministry of Energy will be under pressure to convince markets that Aramco remains strong.
The financial world is watching Sunday when the financial statements of the company are reported. The efforts of Saudi officials at the moment to highlight significant changes in the management of the company, major investments in blockchain, hydrogen and even unconventional energy are probably not enough to stem the growing concern among analysts. Investors and traders will remain painfully aware that the future of Aramco is directly linked to the future of Saudi Arabia. Negative financial reports or reviews will have a tangible impact on the Kingdom. Fortunately for Saudi entities, the world, even oil traders and hedge funds, are currently seeking stability. That sentiment could mean that Aramco’s potentially negative report would be viewed in a more positive light. Whatever the outcome, one thing is for sure, all eyes will be on Aramco this Sunday.
By Cyril Widdershoven for Oilprice.com
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