Aramco faces grilling as oil heads into ‘eye of the storm’

Saudi Aramco’s bottom line has been hit by the oil price shock, but the energy giant has major financial strengths compared with rivals, analysts say. (Shutterstock)
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Updated 09 August 2020

Aramco faces grilling as oil heads into ‘eye of the storm’

  • CEO Amin Nasser to discuss quarterly results and outline future strategy in face of rising market uncertainty

DUBAI: Saudi Aramco, the world’s biggest oil company, will submit itself to two days of intense scrutiny by global investors after the biggest shock to global energy markets in decades.

The company is set to announce its financial results for the second quarter of 2020 — which witnessed the collapse of oil prices in April as global demand collapsed because of the COVID-19 pandemic — and CEO Amin Nasser and other executives will open up to questions about future strategy in an uncertain time for crude.

On Sunday, Nasser will field questions from the international media after posting the financials on the Tadawul exchange in Riyadh where its shares are listed — the first time Aramco has staged a press conference for financial journalists since becoming a public company in the record-breaking initial public offering in December.

On Monday, he will answer questions from the world’s investment experts on vital issues such as the future dividend policy, capital expenditure plans, and how Aramco can thrive in the “new normal” of relatively low oil prices.

Both encounters promise to be eventful after a transformational first half of 2020 that has changed many of the basic assumptions of the oil industry. One industry expert said the period was “the eye of the storm” for the oil industry.

With the oil price about $20 per barrel lower than at the start of the year, some European energy giants are reinventing themselves as champions of a new environmentally aware era, cutting investment in crude exploration and writing down the value of their oil assets.

In the US, the shale revolution has ground to a halt as companies struggle under the new financial regime of $40 a barrel. Some have gone out of business, weighed down by debts and heavy financing costs.

Aramco is subject to those same financial pressures. JP Morgan, the giant US investment bank, estimates that Aramco’s operating income will be down by 64 per cent this year, with a similar fall in earnings for shareholders.

Another big US financial institution, Bank of America, also calculates that many of the key financial metrics will be significantly lower.

But both banks, in pre-results research notes, say that Aramco has advantages lacking among its peer group of independent oil companies in the US and Europe.

“While the results will be understandably weak, we believe that Aramco’s advantages such as low cost of production, long reserve lives and free cash flow generation in a lower oil price environment come to the forefront as industry metrics deteriorate rapidly amid the oil price collapse,” BoA said.

JPM analyst Christyan Malek reiterated the firm’s “overweight” recommendation for Aramco shares — advising investors to buy the stock — highlighting the strength of Aramco’s energy and petrochemicals portfolio, its financial strengths, and the advantage of its low-cost profile to win it increasing market share from rivals.

Accoding to Malek, the “key strategic focus points” of the meetings with journalists and analysts will be the “reiteration” of Aramco’s commitment to a total dividend payout of $75 billion this year, Nasser’s insights on the strength of the global recovery in oil demand, and an update on plans for capital expenditure, slated at around $25-$30 billion for this year.

BoA also highlighted Aramco’s strengths in a fast-changing global market. “Aramco dwarfs its oil and gas peers both by the sheer size of its production and lowest global extraction cost structure. Aramco’s financials also were ahead of such stock market champions as Google, Apple and Amazon,” the firm said.

The second quarter of 2020 was “the eye of the storm”, the bank said. “The second quarter will be a tough one for Aramco as we expect earnings to decline by 60 percent year-on-year. The decline will be mainly driven by oil price collapse, exacerbated by lower official selling prices in April and May,” it added.

Malek agreed. “The second quarter will be a transitory quarter of tough macro-economics, lower crude production at 9.3 million barrels per day, widened realization discounts and rising gearing,” he said.

Both investment houses also expected an impact on Aramco’s financial position from the $69 billion acquisition of SABIC earlier this year.

But they also believe there could be more value to be had from holding Aramco shares, which traded at SR32.95 on the Tadawul last week. BoA set a target price of SR34, while JPM said the shares could reach SR36.


Liberalization of dollar exchange rate at hospitals leaves people dying in their homes in Lebanon

Updated 20 min 23 sec ago

Liberalization of dollar exchange rate at hospitals leaves people dying in their homes in Lebanon

  • Lebanese doctors emigrate after their money, lives, and homeland idea are stolen

BEIRUT: The American University of Beirut Medical Center (AUBMC) has adopted the banks’ approved dollar exchange rate, which is 3,900 Lebanese pounds, in a number of its departments instead of the official exchange rate, which is fixed at 1,507 Lebanese pounds.

This decision has sparked a state panic among people, who fear that the entire private hospital sector would follow suit.

Based on the decision of the AUBMC’s administration, the entrance fee to its emergency department is now 600 thousand Lebanese pounds. This fee did not exceed previously 190,000 Lebanese pounds. Moreover, a visit to a doctor in the hospital’s outpatient clinics jumped to 225,000 Lebanese pounds after it was a maximum of 120,000 Lebanese pounds.

The value of the Lebanese pound against the dollar collapsed during the financial crisis that Lebanon has been facing since the end of 2019. There are now three exchange rates for the dollar. The official exchange rate remains at 1,507 Lebanese pounds, and it applies only to imports of fuel, medicine, and wheat as well as hospitalization costs and insurance agencies. Banks apply an exchange rate of 3,900 Lebanese pounds for dollar deposits. The dollar exchange rate on the black market is 8,300 Lebanese pounds.

Lebanon is suffering from a shortage of dollar reserves at the Banque du Liban, and this has been reflected in the gradual removal of subsidies on basic materials, especially medicine.

The president of the Syndicate of Private Hospitals, Suleiman Haroun, said: “There is pressure on private hospitals, but we hope that part of the dues for private hospitals will be paid so that they can carry out their duties.”

Haroun warned that “if the subsidy on medical supplies and medicines is removed, people will die in their homes and not at the doors of hospitals.”

He said that he had been informed by an importer that the central bank had removed subsidies on sterilization materials.

Haroun pointed out that the decision of one of the major hospitals to adopt the dollar exchange rate of 3,950 Lebanese pounds does not apply to the official tariffs with the guarantors.

The most prominent of these guarantors are the National Social Security Fund (NSSF), the Cooperative of Government Employees, and tens of health insurance companies.

The director-general of the Cooperative of Government Employees, Dr. Yahya Khamis, warned that the hospitals’ adoption of a dollar exchange rate of 3,950 Lebanese pounds means that “disaster will inevitably happen.”

Bechara Asmar, head of the General Labor Union, expects other private hospitals to follow the example of the AUBMC early next week. He warned against “the policy of infiltrating the rights of the working class and people with limited incomes.”

He said: “This means an increase in the cost of the hospital bill to more than three times and the collapse of the purchasing power of citizens and guarantors. This will result from the inability of the NSSF, the Cooperative of Government Employees, military sectors, and insurance companies to fulfill their obligations. The citizens will have to bear the difference, which is equivalent to double what the guarantor companies pay.”

Asmar highlighted that “this will lead to the collapse of the health system as a whole.”

The decision’s advocates believe that adopting the banks’ dollar exchange rate for the pricing of hospital services is similar to what happens with the subsidized food basket – this subsidization adopts the dollar exchange rate of 3,900 Lebanese pounds, not the fixed official exchange rate of 1,507 Lebanese pounds.

An official in an insurance company said: “If the matter applies to all medical services in hospitals, the difference that will result from the hospitals and insurance agencies’ adoption of the fixed exchange rate will be borne by either the citizen or the insurance companies, which still charge the citizens insurance premiums at the official exchange rate.”

The head of the General Labor Union refused to adopt “any hidden tariff, as is currently happening, because this would be met with immediate action, taking to the streets, and staging sit-ins outside these hospitals.”

Health Minister Hamad Hasan stressed on Thursday that “subsidies for the health and hospital sectors and the medicine sector will not be affected at the present time, and this is out of the question.”

Hasan announced that a solution has been reached “between the Syndicate of Private Hospitals and the Ministry of Health requiring that dues are paid to private hospitals within a month for coronavirus patients through a loan of $39 million from the World Bank.”

He said: “The Ministry of Health follows the Lebanese law, and everyone must participate in the solution, not the other way around. Enough bidding on people’s pain. Any individual action taken by a hospital exposes it to accountability.”

Former Health Minister Mohamed Jawad Khalife, however, said: “The decision of the AUBMC is very transparent because all the hospitals charge patients based on the dollar exchange rate of 3,000 Lebanese pounds without officially announcing it. Let the minister of health kindly take from me an admission document into any hospital to realize that the 15-percent difference between the pricing of the Ministry of Health and that of the hospitals is received by the hospitals, which charge citizens 8,000 Lebanese pounds.”

It does not seem that the problem of hospitalization in Lebanon is limited to the financial issue. Hospitals are facing the resignation of many of their doctors, who are emigrating to other countries after accepting offers after the collapse of the purchasing power of the national currency.

One of the nurses at a well-known hospital in Beirut said: “The hospital is in a very bad condition as if it is deserted. Patients who used to come from abroad for hospitalization in Lebanon can no longer come because of coronavirus. Lebanese patients postpone non-urgent operations until after the pandemic. Some of the doctors whose incomes have declined due to the financial crisis and the coronavirus crisis began to emigrate abroad. Among these are well-known doctors.”

Former Health Minister Dr. Karam Karam said: “In the 1980s, doctors emigrated from Lebanon because of the war, but there remained hope in the country. Now, we have many qualified doctors leaving Lebanon either to the United States or to the Arabian Gulf countries, and the reason is financial. Many of these doctors’ children are continuing their education abroad, and the doctors are no longer able to pay their tuitions due to the freezing of their deposits.”

He added: “As a doctor, what I earn is not sufficient to pay my clinic's rent or my assistant’s salary. More seriously, there are a number of highly qualified histologists who will leave Lebanon as well. The situation is tragic. They stole our money, our lives, and our dignity. They even stole the idea of the homeland. They are a group of thieves and mafia controlling this homeland. They made us hate Lebanon and even Palestine because of what they do in their names.”