Aramco Hitting Bulls Eye, Cash Flow Enough to Pay Dividend

The ongoing energy crunch and global market push increasing oil prices have filled the coffers of world’s largest oil producer Saudi Aramco. The Saudi national oil company reported a 158% in net income during Q3 2021, reaching a level of $30.4 billion. At the same time, the oil giant’s free cash flow showed a surge of 131% at the same time, leaving enough to pay for its quarterly dividends.

The results of Aramco are inline with reports published by its compatriots, such as Royal Dutch Shell and others. With analysts expecting a median net income of around $29.1 billion, the company has beaten expectations, especially when looking at a net income of $11.8 billion in Q3 2020. Saudi Aramco President and CEO Amin Nasser stated that “some headwinds still exist for the global economy, partly due to supply chain bottlenecks, but we are optimistic that energy demand will remain healthy for the foreseeable future”.

On both sides o f its operations, Aramco has shown impressive results, as higher crude oil prices in combination with larger sold volumes, combined with better margins in refining and chemicals have boosted overall income significantly.

The Saudi oil kings have been sailing the global oil markets lately with all wind in their sails. High WTI/Brent price levels, currently at levels not seen since 2014, have been substantially supporters. At the same time, another unexpected boost came from the energy supply crisis within natural gas markets, which not only have been beneficial on that side, but also have pushed for natural gas – crude oil substation in several regional markets.

The Saudi giant has also declared that it will be paying a dividend of around $18.8 billion in Q4 2021, which is a significant financial injection not only to its private shareholders but also the Saudi government. The company indicated that the dividend can be paid by a jump in free cash flow to $28.7 billion in the third quarter, which is an $16.3 billion increase in comparison to the same period in 2020. Financial analysts are also going to be looking at the overall gearing of the company, aka the debt position of Aramco. Due to higher oil prices and stronger cash flows, the gearing has improved from 23% to 17.2%.

Oil markets analysts again will be more than satisfied, as the global oil giant indicated it has a capital expenditure of around $7.6 billion in Q3 2021, an increase of around 19% in comparison to Q3 2020. These figures are highly important, not only in light of upstream and downstream investments but also in light of the announced major production capacity boost Aramco has indicated. For 2021 the company expects total capital expenditure to be around $35 billion.

The coming weeks Aramco and other national oils (ADNOC, Gazprom etc) , but also independents such as Shell or Total, will be in the crossfire of COP26 Climate Change activists and western governments. Even that the world is not able to deal with a fossil free economy for decades, pressure is mounting on especially Western companies at present.

Aramco, and ADNOC, however have been very actively seeking a rational answer to the media and political onslaught. Climate initiatives have been announced, as Aramco and ADNOC have committed to a Net Zero 2050 pathway. Both giants are however very clear about the coming decades. Energy transition is being supported but more investments are needed in hydrocarbons. Al Rumayyan stated to the press that “we need a transition that does not ignore that petrochemicals are essential building blocks to modern life — including the smartphones we all use and the products we rely on to fight COVID”.

The main critical parts of Aramco’s current Net Zero 2050 drive still needs to materialize, as the latter not only will need to deal with multibillion investments in cutting emissions in Kingdom but at the same time accommodate the company’s drive to increase oil output to 13 million bpd by 2037. Due to the still existing OPEC+ export agreement, Saudi Arabia is currently only producing around 9.6 million bpd, which is still 1.1 million bpd higher than in Q2 2021.

Potential risks however are still there for Aramco, and its sister company SABIC. The latter reported also its financial results, which was less optimistic. SABIC, also called Saudi Basic Industries Corporation, owned by Aramco, saw profit fall as rising feedstock costs lowered its margins.

The world’s largest chemical company reported a net income of $1.5 billion for Q3 2021, 5 times more than in 2020, but 27% less than in Q2 2021. Even that overall chemical prices have recovered, but logistics, partly due to COVID, but also other issues, have been detrimental. The latter have caused a major margin decline.

Officials even have indicated that margins could fall further the coming months. With revenues hitting $11.7 billion in the third quarter, up 3% from the previous three-month period, the company hit a free cash of $2.2 billion, an increase of 57%. SABIC’s net zero plans are estimated to cost around $3-4 billion the coming years.

A first indicator what to expect from Aramco, and SABIC, the coming months, will be given already on November 4, when OPEC meets to discuss its oil production and export strategies. Looking at current financials of Aramco, it will be expected that Saudi Arabia’s minister of energy Prince Abdulaziz bin Salman is not going to push for increased export volumes by the oil group. Profits and margins are too good not to take advantage of. COP26 and G20 calls on OPEC+ producers will be taken onboard, but the storm is not yet blowing oil ships off course.