The coronavirus pandemic is upending the energy industry and pushing its top players to make big changes. That includes Saudi Aramco, the world’s largest and most profitable oil producer.
The dramatic crash in prices this year is weighing on Saudi Arabia’s state oil giant, which relies on pumping crude to generate the cash it needs to pay dividends to investors and finance a big chunk of government spending.
Now, Aramco may be forced to do what was once unthinkable: abandon deals and sell assets. First on the block could be its plan to build a network of refineries in the world’s biggest markets in a bid to extract more value from each barrel of crude it pumps.
Deals to get into the refining business in China and India- two of the world’s biggest energy consumers – appear to have been put on hold in recent weeks. Mid week media reports suggested that Aramco would also delay the expansion of a major refinery in the United States.
“It is fair to say that there is a re-evaluation of everything at the moment,” said an Aramco source familiar with business strategies regarding the projects.
The realignment of priorities could have long term consequences for the company and the Saudi kingdom, given the politically sensitive nature of some projects.
“There’s always politics involved,” said Imam Nasseri, Middle East managing director at Facts GLObal Energy.
Lower For Longer
The big problem for Aramco is the outlook for oil prices, with Brent crude futures, the global benchmark, still 33% lower than they started the year. Between April and June, Aramco’s net profit plunged more than 73% to $6.6b as lockdowns necessitated by the pandemic sharply reduced demand for energy products.
CEO Amin Nasser said last month that as economies begin to reopen, demand is experiencing a “partial recovery.” Still, analysts are pushing back their horizons for a full recovery, while some in the industry are open questioning whether global oil demand has already peaked.
Jim Burkhard, head of oil markets at IHS Markit, recently told clients that demand won’t reach pre-pandemic levels until at least the end of the first quater of 2021.
“For demand to fully return, travel – especially air travel and commuting to work – needs to get back (to) normal,” Burkhard said in a research note. “And that won’t happen until there is containment of the virus and effective vaccines.”
This backdrop is particularly problematic for Aramco because its saddled with $75b in annual dividends for the next five years.
Those dividends were a central part of the pitch to investors during its initial public offering in December, and are crucial reason Aramco is still worth $1.9tr, making it the world’s second most valuable public company behind Apple. Shares curently trade about 13% above their IPO price.
BP and Shell have both cut their dividends to help preserve cash- but for Aramco, that’s not an option.
“Outside of the dividend, the stock looks extremely expensive,” said Anish Kapala, an investment advisory firm based in London, “If they are ever going to attract more investors into the company,I think the dividend needs to stay at the current level.”
“The company is also expected to make payouts to the Saudi government, which relies on oil income to fund heavy social and military spending. The crash in oil prices could force Crown Prince Mohammed bin Salman to scale back his Vision 2030 plan to reduce Saudi Arabia’s dependence on crude exports, which had included several massive tourism projects and the construction of a futuristic city.
