What’s next for the world’s largest oil company as profits decline? Analysis by OilPrice

Saudi Aramco, the world's largest oil company, has made headlines once again with its lower Q1 profits of $31.9 billion, which is a 19.25% decrease compared to the same period a year earlier when it made $39.5billion.

This drop in profits can be attributed to global market developments, such as reduced oil prices and production cuts, Cyril Widderhsoven writes in his article for OilPrice.

Despite this, Aramco's overall profits remain staggering when compared to its peers.

In its report, the Saudi company revealed that the decrease in profits was primarily due to lower crude oil prices, although this was partially offset by lower taxes and higher finance and income.

The global markets have been experiencing volatility lately, with a partial banking crisis affecting the markets, and the anticipated demand surge from Asia, especially China, failing to materialize. Aramco is also facing tough competition from Russia, which is eating into its market share in Asia's major markets by offering significant discounts, leading to partially reduced prices.

Despite the decrease in overall revenues by 10.61% to SAR459.8bn in Q1 2023, compared to SAR517bn in Q1 2022, Aramco's net-profit increased by 3.75% when compared to the $30.73 billion reported in Q4 2022. Amin Nasser, the CEO of Aramco, attributed this success to the company's unwavering reliability, focus on cost, and ability to respond to market conditions. The company remains committed to paying out a dividend of $19.5bn in the second quarter of the year, in line with the previous quarter.

Additionally, Aramco plans to introduce a mechanism for performance-linked dividends to provide shareholders with a balanced mix of growth and yield. The amount of this dividend will be determined with the annual results and distributed in addition to the existing dividend payments. Aramco has indicated that it is exploring a scheme in which additional payouts would target 50-70% of annual free cash flow, net of the base dividend and other amounts, including external investments.

Furthermore, Aramco has reiterated its commitment to increasing investments in unique growth opportunities, though no specifics were provided. Analysts predict that the company will focus on increasing investments in global energy mix opportunities, particularly in the fields of green hydrogen, green ammonia, and other new fuels. The Saudi giant is already targeting low-carbon fuels.

Currently, Aramco's capital expenditures and external investments in Q1 2023 are SAR32.8bn and SAR9.9bn, respectively, and the company is targeting a capital expenditure of $45bn to $55bn for 2023. In recent weeks, Aramco has announced a flurry of new investments, such as its acquisition of a 10% stake in China's Rongsheng Petrochemical Company for SAR13.5bn, expanding its downstream presence in China. As part of a long-term sales agreement, Aramco has also committed to supplying 480 million bpd of crude oil to Rongsheng Petrochemical's affiliate, Zhejiang Petroleum and Chemical Company. Additionally, Aramco has completed its acquisition of Valvoline's global products business, valued at SAR10.4bn.

For years, analysts have been closely examining Aramco's dividend policies and anticipating significant changes if necessary due to the financials of the Saudi government. As Aramco remains the primary source of revenue for the Saudi government's budget and investment projects, any additional dividends would be welcomed, particularly as weaker oil prices have already led to a deficit in the state budget. The current financial report is a godsend for the Saudi government, as it has already boosted Aramco's share price by 3.7% to 4%. This is especially attractive considering that the Saudi government directly holds a 90% stake in the oil giant, while the Saudi sovereign wealth fund PIF holds around 8%. Overall, Saudi Aramco's share prices have risen by 16% over the past year, surpassing all of the Seven Sisters (such as Shell and BP).

This week, the Ministry of Finance of Saudi Arabia announced that the country saw a deficit of 2.91 billion riyals ($770 million) in the first quarter of the year. The main cause of the deficit a substantial increase in government spending, particularly in its Vision 2030 program aimed at economic diversification. The MOF's budget report revealed that despite higher non-oil revenues that partially offset the budget expenditure, total spending rose by 30%, resulting in a budget deficit. This situation could persist for a longer period if oil prices do not increase or generate more oil revenues. The Kingdom's ongoing efforts to diversify its economy are imposing a significant burden on government finances, despite the substantial increase in foreign direct investment (FDI).

Saudi financial advisors will be keeping a close eye on Aramco, and whatever is being said by Vision 2030 supporters, the main money maker for the kingdom remains oil and gas. New megaprojects will not only require access to international financial markets but may also lead to additional sales of Aramco shares by the kingdom to raise funds.

Many other GCC countries will need to reevaluate their own situation as well, as Saudi Arabia's situation serves as a leading example in many ways for the region.