Saudi Aramco Profit $US42.43 billion With Decline in Refining and Chemicals Margins

The Kingdom of Saudi Arabia controlled Saudi Aramco Oil reported on Monday third quarter earnings of $US42.43 billion down from the previous quarter’s record high. Profit was driven by higher crude-oil prices and volumes sold. Profits were up from up from $30.43 billion in the same period a year earlier. The result follows big oil rivals record profits. The UK’s BP, Netherland’s Shell, America’s ExxonMobil, the largest U.S. oil company, Chevron and Phillips 66 all crushed earnings on surging oil and gas prices. Oil prices have pulled back around 30% since suggesting these record profits may be high points.

saudi aramco

Aramco is majority owned by the Saudi Arabian royal family

The company said it would pay a dividend of $US18.8 billion as cash dividends for the third quarter. This payment is a key source of revenue for the Saudi government, as it has promised to do since its IPO when it floated around 5 per cent of the company on the Saudi stock market in late 2019. Aramco’s free cash flow increased to a record $45 billion for the quarter, up from $28.7 billion in the same quarter last year, it noted.

Aramco Q3 2022 Record Earnings

Highlights

  • Net income rose to $42.43 billion in the third quarter, up from $30.43 billion a year earlier
  • Upstream income before taxes of $78 billion.
  • Downstream unit, responsible for refining, chemicals and fuel distribution, made a pre-tax loss of $1.1 billion, compared with a profit of almost $4 billion a year earlier.
  • Free cash flow a record $45 billion
  • Reduced gearing negative for the first time since early 2020 from 7.9% last quarter and from 14.2% at the end of 2021.
  • On track to increase crude oil maximum sustainable capacity from 12 million barrels per day to 13 million by 2027.

Aramco said the decrease in profit from the record last quarter was because of lower oil prices compared with the second quarter and a decline in refining and chemicals margins. Oil prices have cooled since the peak in March following Russia’s invasion of Ukraine but Brent crude, the global oil benchmark, priced at an average of $70.86 a barrel last year and was at $41.96 a year earlier. It last traded at $94.09 a barrel on Tuesday.

The downstream unit, responsible for refining, chemicals and fuel distribution, made a pre-tax loss of $1.1 billion, compared with a profit of almost $4 billion a year earlier. “This result was largely driven by inventory re-valuation losses” as prices of refined products fell, Aramco said. Sabic, a chemicals firm 70%-owned by Aramco, announced a steep drop in profit on Sunday amid lower demand for goods from paints to plastics.

“While global crude oil prices during this period were affected by continued economic uncertainty, our long-term view is that oil demand will continue to grow for the rest of the decade,” Aramco Chief Executive Amin Nasser said.

Saudi Arabia, the world’s largest oil exporter, is using the money to boost its economy and jump-start projects proposed by Crown Prince Mohammed bin Salman, who runs the kingdom’s day-to-day affairs for his father, King Salman. The kingdom is trying to diversify away from oil by creating new industries such as tourism, mining and auto manufacturing.

The International Monetary Fund expects Saudi Arabia to be one of the world’s fastest-growing economies this year, expanding by 7.6%, the quickest growth in almost a decade.

Saudi Arabia last month led a 2 million barrels-a-day production cut by the 23-member oil-producer OPEC+ cartel. Saudi Arabia is likely to need $76-$78 a barrel to balance its budget next year, economists say, based on preliminary forecasts.

Saudi Arabia and other Gulf states have also used their windfall oil income to help crisis-racked neighbors such as Egypt, Pakistan and Turkey, a diplomatic tool they have long used to build their geopolitical power.

Production

Aramco would have no problem producing 12 million barrels a day if asked to by the Saudi government, Nasser said. The company is on track to increase crude oil maximum sustainable capacity from 12 million barrels per day to 13 million by 2027.

Aramco could also have another 1 million barrels a day available for export by 2030 as the country looks to replace crude oil burning power stations with gas and renewable power.

ESG Initiatives

Aramco is majority owned by the Saudi Arabian royal family, and has been working towards a number of environmental, social and governance (ESG) initiatives underway to reduce its global footprint as it moves to achieve net-zero greenhouse gas emissions across the portfolio by 2050.  That movement came about after the company was listed publicly on the Tadawul exchange.

We see a more aware Aramco in 2022 with its flagship iktva program aims to build a “diverse, sustainable and globally competitive” supply chain to supply the Kingdom’s energy sector. “As we collaborate with domestic and international partners to explore new and emerging technologies and solutions, from developing cleaner transport technologies to establishing low-carbon hydrogen and ammonia value chains, I am more optimistic than ever about the positive contribution we can make, both to our customers and to the ongoing global energy transition,” Nasser said.

The company is scheduled to release a more detailed breakdown of its results, including the performance of its upstream and downstream units, on Monday. The latest updates from Q1 are below:

Expanding Downstream Operations

  • Aramco is acquiring a 30% stake in a 210,000 b/d refinery in Gdansk, Poland, along with sole ownership of an associated wholesale business.
  • Aramco agreed to acquire a half-stake in a Polish jet fuel marketing joint venture with BP plc.
  • Aramco also made a final investment decision to participate in developing a 300,000 b/d integrated refinery and petrochemical complex in China.
  • Downstream consumed almost 45% of Aramco’s crude production during 1Q2022.
  • The company also achieved 99.9% reliability “in its deliveries to customers” in the quarter.

Natural Gas Expansion

Natural gas output is on track to grow by 50% in 2030 with expansions in the country’s Haradh and Hawiyah fields. The projects, scheduled to be onstream by year’s end, would increase gas compression by 1.3 Bcf/d. Furthermore, the Hawiyah Gas Plant expansion, part of the Haradh Gas increment program, should ramp up in 2023. 

Capital spending in 1Q2022 was $7.6 billion, down by 10% from 1Q2021, “mainly due to certain gas projects nearing completion,” management said. Capital outlays are set to increase “until around the middle of the decade, to support the company’s long-term strategy realization.”

Aramco completed a lease and leaseback deal for its natural gas pipeline network with an investor consortium led by BlackRock Real Assets and Hassana Investment Co. With an upfront payment of $15.5 billion, the consortium acquired a minority (49%) stake in a new subsidiary, Aramco Gas Pipelines Co. 

Nasser said by maximizing in “high-growth areas …. Aramco captures additional value across the hydrocarbon chain, expands its sources of earnings, and provides resilience to oil price volatility.”

Voluntary Carbon Market

The Kingdom established a voluntary carbon market (VCM) with the Public Investment Fund, the country’s sovereign wealth fund. A memorandum of understanding in March makes Aramco one of five inaugural partners in the Middle East and North Africa regional voluntary carbon market (VCM).

The VCM is the first of its kind in the region, is to serve as a platform to buy, sell and trade verified carbon equivalent credit certificates.

IPO History

Aramco listed in Riyadh in 2019, 94% remains state-owned. With shares up 25% this year it has a market valuation of $2.4 trillion.

With the war in Russia and the tension in OPEC+ no doubt Aramco remembers back in 2017 the problems with the failure of oil to substantially recover and Russia then overtaking Saudi Arabia as the leading exporter of crude to China the Kingdom.  They stepped up talks with some of the world’s largest sovereign wealth funds and institutional investors for the Aramco IPO. In the end we saw a smaller IPO and only on the Saudi stock market, much the result of a collapsed oil price.

From there we had the Covid19 demand crunch which was not expected and as we opined at the time what should have been expected was Russia’s betrayal of the price agreement. Fast forward and Russia have invaded Ukraine and after poorly thought ESG populist policy not enabling sound energy transition causing oil prices to spike higher before the war.

Nasser said Aramco could sell shares in some of its units on the Saudi stock exchange as part of a “portfolio optimization” plan that has already seen it sell off stakes in subsidiaries that lease its oil and gas pipelines.

Aramco is considering a plan to list its trading unit, people familiar told Bloomberg in May.

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Sources: Bloomberg WSJ, Ellen Wald, TC

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