Aramco results are proof that consistency is key
Saudi Aramco provided a master class of what it takes to steer a large corporation and national champion through troubled waters and what it takes to come out on the other side unscathed — even stronger in terms of market access for its future incremental barrels.
Saudi Aramco released blockbuster results on Sunday. Net income beat expectations with SR95.6 billion ($25.5 billion) and was also the second-highest since the fourth quarter of 2018. Free cash flow stood at $22.6 billion. The company will disburse $18.8 billion worth of dividends for the quarter, maintaining its $75 billion-per-year dividend which it promised when it took the company public at the end of 2019.
What a difference a year makes: Q2 2020 was the worst ever for oil companies as the coronavirus (COVID-19) pandemic hit oil markets. At that time most analysts questioned Aramco’s resolve to maintain its dividend. Now they are even asking whether it would not make sense to increase it to keep the shares' yield competitive compared to international oil majors.
Thanks to the strong production discipline by OPEC+ starting at 9.7 million barrels per day (bpd) of production cuts in May 2020, broken oil markets recovered and are going gangbusters, despite the virulent delta strain impacting economies particularly east of the Suez Canal.
Through the past 12 months, analysts have criticized Aramco for sticking to its dividend promise. The company proved that it is willing to stick to its promises — even if the going gets tough, which in the long run, can do wonders for investors’ confidence.
Aramco also used the windfall to pay back debt: Gearing stands now at 19.4 percent, which is just a smidgeon above its 15 percent target.
What really stood out was that Aramco is staying the course and bucking the trend. While the supermajors also had stunning results, they are using a lot of the windfall profits to reorient their portfolio towards renewables.
Aramco has a broad alignment between the objectives of the board and management with respect to environmental criteria.
Aramco CEO Amin Nasser pointed out that the current environment provided a great opportunity for the company to expand production capacity, especially as international oil companies (IOCs) were reducing their production capacity due to public pressure and the climate change debate, which is particularly gathering pace in the countries belonging to the Organization for Economic Co-operation and Development.
Nasser does have a point, particularly when looking at the developing world, as its growing population needs more energy. Aramco is a low-cost producer and also one of the environmentally friendliest producers, which propels it into pole position for supplying that incremental barrel.
The different course between Aramco and other national oil companies compared to IOCs is closely linked to how boards look at the strategies of the world’s IOCs.
In recent months we have seen court injunctions against the likes of Shell criticizing their greenhouse gas (GHG) emissions and level of production in the context of the global warming debate.
Even stalwarts such as Exxon and Chevron were faced with nasty battles with their shareholders as activist investors with an environmentalist agenda forced their representatives onto the boards.
Aramco has a broad alignment between the objectives of the board and management with respect to environmental criteria, which is also enabled by the company’s quest to be one of the lowest emitters of GHG in the business. It is also in line with the county’s environmentally friendly strategy as evidenced by the Saudi and Middle East green initiatives.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.