Saudi Aramco’s net profit drops 45% in the third quarter on weak oil demand

Oil tanks at an oil processing facility of Saudi Aramco, a Saudi Arabian state-owned oil and gas company, at the Abqaiq oil field.

Stanislav Krasilnikov | TASS via Getty Images

DUBAI, United Arab Emirates — Saudi Aramco’s net profit fell 44.6% in the third quarter of 2020 compared to the same period last year, reflecting continued damage to oil demand and prices from the global coronavirus pandemic.

Net profit dropped to 44.21 billion riyals ($11.8 billion) this quarter from 79.84 billion riyals in the third quarter of 2019.

The figure is in line with analyst estimates, revealing a recovery from the historic revenue drop in the second quarter that saw profits plummet to 24.75 billion riyals.

The Saudi kingdom’s state oil company saw lower crude oil prices and volumes sold, as well as weaker refining and chemicals margins, the company said in its release Tuesday. It also saw a decrease in oil production royalties, a drop in the royalty rate from 20% to 15%, and lower income taxes and zakat (Islamic taxes).

The national producer has maintained its third-quarter dividend of $18.75 billion, to be paid in the fourth quarter. Its second-quarter dividend was declared at the same level in August, also to be paid in the following quarter. Aramco’s first quarter dividend was paid in the second quarter.

Aramco listed 1.5% of its shares locally on the Saudi Tadawul last year, which analysts say has reshaped many of the company’s priorities, including that of its commitment to shareholders.

“Aramco has made this very strong dividend commitment to shareholders as part of the IPO,” Neil Beveridge, a senior oil and gas analyst at Bernstein, told CNBC’s “Capital Connection” on Tuesday.

“And that really was a cornerstone promise I think, for any investor that was investing in Saudi Aramco and that’s something that … the company will want to sustain, along the lines that they committed to in the IPO.”

Aramco’s stock price on the Saudi Tadawul was up just under 1% at 34.50 riyals per share within an hour of the exchange’s open. Brent crude was trading at $39.55 per barrel, having dropped dramatically at the start of this week as several European countries return to lockdowns amid soaring coronavirus cases. The international oil benchmark is down more than 36% year-to-date.

Like virtually all oil producers, the company announced significant cuts to capital expenditure as crude prices crashed with the onset of the pandemic. Capex for the third quarter was $6.4 billion, with projects including a planned $20 billion crude-oil-to-chemicals project with the Saudi Basic Industries Corporation (SABIC) put on hold or being “reevaluated.”

Capex cuts are ‘prudent’

The downstream market has been particularly hard-hit, with Aramco’s recent investments in the petrochemicals business proving to be more of a liability than an asset thanks to the pandemic, Beveridge said.

“We’ve seen historic lows in terms of refining margins from the third quarter. And of course with Aramco completing the SABIC acquisition, there’s really no good news for Aramco when it comes to the refining and petrochemical business.”

“Aramco is doing everything they can to increase efficiency and lower cost, but that doesn’t necessarily involve increasing capex,” Beveridge added. “Remember a lot of the capex expansion plan that had been envisaged was around raising capacity and that capacity just simply isn’t needed in the market at the moment, so I think capex cuts are the prudent thing to do.”

The company has said it expects capital expenditure to be at the lower end of the $25 billion to $30 billion range for 2020, compared to $32.7 billion for 2019. “Aramco continues to execute capital spending optimization and efficiency programs in response to the current business environment,” it said in its earnings release Tuesday.

Source: CNBC