Saudi Aramco sailing through the storm caused by pandemic
Last Sunday I was invited, along with a number of columnists and opinion leaders, to attend a phone press conference organized by Saudi Aramco, to share with us the financial results of the company’s fiscal year 2020.
Amin Nasser, Aramco president and CEO, stressed the positive performance of the company, especially when considering the negative impact the coronavirus disease (COVID-19) outbreak has had on the world.
He put the business’ positive financial performance down to its operational excellence and financial discipline, basing his judgment on a number of positive factors. The company reported net income of SR184 billion ($49 billion), cash flow from operating activities of SR285 billion, and free cash flow of SR184 billion.
Despite the tough financial year that all oil companies around the world went through in 2020, Aramco has stood by its commitment to shareholders by declaring a full-year dividend payment of SR281 billion.
In a press release issued by Aramco, Nasser said: “In one of the most challenging years in recent history, Aramco demonstrated its unique value proposition through its considerable financial and operational agility.
“As the enormous impact of COVID-19 was felt throughout the global economy, we intensified our strong emphasis on capital and operational efficiencies and, at the same time, the accelerated deployment of digital technologies across the company significantly enhanced our performance and we continued to make progress on breakthrough low-carbon solutions.”
Definitely, Aramco, with its prudent management style and long-standing experience in oil production, has managed to navigate through the pandemic storm safely, by relying on the company’s many strengths. These include Aramco’s huge production and refining capacity and the fact it enjoys the world’s lowest cost production per barrel of oil, which gives it an advantage in a low-price environment.
A concern about the company’s financial results is the 18 percent reduction in capital expenditure last year to SR101 billion from SR124 billion in 2019. This drop may limit the company’s ability to expand its normal business activities and invest in innovative energy projects.
In addition, there is the fact that Aramco will continue to assess its capital expenditure and efficiency programs and expects capital expenditure for this year to be around SR131 billion, significantly lower than the previous guidance of between SR150 billion and SR169 billion.
Aramco has announced that its international bond issuance in the fourth quarter achieved record demand for a 50-year tranche and was 10 times oversubscribed compared to its initial offering size.
It indicated that this reaction to its bond issuance demonstrated global investor interest and market confidence in its long-term strategy and performance outlook.
But Aramco should be very careful not to issue bonds excessively, especially when it has enough free cash on hand to avoid any potential negative impact, due to the cost of servicing debts.
Despite the reduction in the net income of the company in 2020 by 44 percent compared to 2019, the company is still showing strong financial results, especially when conceding the negative impact of the COVID-19 pandemic.
Aramco’s ambition to transform the company into a major global petrochemical player, with operations in more than 50 countries and focusing on expanding its downstream operations, will help it continue to enjoy robust financial success in the future.
• Talat Zaki Hafiz is an economist, financial analyst and a board member of the Saudi Financial Association. Twitter: @TalatHafiz