Saudi Aramco, the world’s largest oil and gas company, will present its 2020 financial results on Sunday, March 21. Given the turbulence and volatility of 2020, Aramco’s results may reveal some of the trends that should be watching in the oil industry over the next decade. The impact of COVID-19, the massive destruction of demand, high oil price volatility and continued weak demand are all factors to keep in mind when assessing the upcoming Aramco numbers. As a semi-listed national oil company, Aramco has the largest oil reserves in the world, with an estimated size of approximately 276 billion barrels of crude oil. The financial results reported by the five integrated super majors – ExxonMobil, BP, Shell, Chevron and Total – may lead some to expect weak results from Aramco. Together, the oil giants posted a combined record loss of $ 76 billion in 2020. While most of that loss was due to impairments and write-offs estimated at about $ 69 billion, the real concern for shareholders is the net losses. ExxonMobil reported losses of $ 22.4 billion, Shell and BP reported losses of more than $ 20 billion, and Total and Chevron reported net losses of $ 5 billion to $ 6 billion. The costs of the global energy transition and the immense pressure to reassess the value of existing reserves or to divest large chunks of assets have hit these companies hard.
However, Aramco will not be affected by these developments as the national oil company is not yet adjusting its reserves or divesting its international operating assets. While the Saudi giant is adapting its overall operations to cope with the global energy transition by relying entirely on hydrogen and unconventional resources, it still plans to produce every barrel of oil it can. As a national oil company, Aramco does not have to bow to activist investors or short-term trends. That means that oil and gas will remain the main revenue generator for the coming decades.
Related: Rarely-Used Recovery Method Can Unlock Billions of Barrels in Alaska
The most interesting parts of Aramco’s financial report are the possible changes to its budget as it has already cut its CAPEX budget and some major projects have been delayed. However, global oil prices have largely recovered this year, so some analysts are optimistic about Aramco’s near-term future. Realistically, the current CAPEX cuts and the postponement of major programs are likely to be extended, despite being in a class of their own when it comes to production and spare capacity. Several major international projects have already been halted, such as downstream India, but Aramco will need to keep production in place and possibly even increase spare production capacity to counter potential demand growth in 2022. Aramco’s CEO Amin Nasser has already indicated that he is cautiously optimistic. on global oil markets, with growth expected in 2022.
Based on the first three quarters of 2020, Aramco’s FY2020 figures are expected to be lower than 2019. In Q3 2020, Aramco reported a 44.6% decline in earnings to $ 11.79 billion, compared to $ 21.29 billion in Q3 2019. The company reduced the 2020 CAPEX budget to less than $ 25 billion, which is considered a critical level when looking at the investments needed to counteract the decline in production. Some analysts expect similar CAPEX budgets for 2021, which would hurt the current bullish sentiment in the oil market.
In the short term, it will be Aramco’s net profit and overall margins that will drive the markets. As the largest oil producer in the world and the main power in the OPEC + agreement, Aramco’s financial stability is an important indicator of the stability of Saudi Arabia and the larger oil market. As the main source of government income, the pressure on Aramco’s financial situation is enormous. Investors and Saudi government officials will be very wary of potentially negative news. They will also be concerned if Aramco’s financial situation is not healthy enough to meet the company’s CAPEX / OPEX needs while also paying out $ 75 billion in dividends. If revenues are very low, the dividend issue could destabilize the future of the company as any further cut in CAPEX would be cast in a very negative light. A possible expansion of production capacity, as ordered by the Saudi government in March 2020, has not yet been implemented due to low oil prices and CAPEX cuts. New production expansions, such as Marjan, Berri, Safaniya and Zuluf, have been delayed, while opportunities in the Red Sea offshore are currently still on ice. Aramco’s figures will indicate how strong the oil giant’s position is at the moment and whether its production capacity will be under pressure.
Related Video: Why the Oil and Gas Plant Is Important
At the same time, analysts will keep a close eye for any mention from Saudi Aramco officials about the ongoing escalation of the Yemen crisis. Increased drone attacks coupled with the new long-range missiles from the Houthis and other Iranian allies pose a major threat to Aramco. The escalating Yemeni conflict poses a major threat not only to stability in the region, but also to Aramco’s attractiveness and stability. If a coordinated drone missile strategy is put in place, supported by Iran or other forces in the region, Aramco’s oil production and export capabilities will be severely hampered.
Weaker financial results, Riyadh demands a higher percentage of revenues, continued instability in the region and low oil prices are not a cocktail that will attract new investors or financial institutions. Aramco’s management and Saud’s Ministry of Energy will come under pressure to convince markets that Aramco remains strong.
The financial world will watch on Sunday when the company’s financial data is reported. Saudi officials’ current efforts to draw attention to substantial changes in the company’s management, major investments in blockchain, hydrogen, and even unconventional energy, are unlikely to be enough to stem growing analyst concerns. . Investors and traders will remain painfully aware that Aramco’s future is directly linked to the future of Saudi Arabia. Negative financial reports or assessments will have a tangible impact on the Kingdom itself. Fortunately for Saudi entities, the world, even oil traders and hedge funds, is seeking stability right now. That sentiment could mean that Aramco’s potentially negative report will be viewed in a more positive light. Whatever the result, one thing is certain: next Sunday, all eyes will be on Aramco.
By Cyril Widdershoven for Oilprice.com
More Top Reads from Oilprice.com: