Analysis: Saudi Aramco's coronavirus strategy in focus in Q1 earnings presentation

It may have only been six months ago, but Saudi Aramco's stock market debut took place in a different world. With the global economy under siege, attention is focused on how the world's biggest oil company will adapt to decimated demand and low prices.

On Tuesday, the Saudi state-run company will provide insight into its COVID-19 coping strategies when it presents its first quarter earnings. Analysts and investors will be looking for guidance on how Aramco plans to adapt in terms of capital expenditure, investment into expanding spare capacity despite weak fundamentals and its commitment to paying a dividend.

After years of uncertainty, Aramco made its much anticipated debut as a public company in December, listing a sliver of its shares on the Saudi domestic stock exchange. The overwhelming majority of the company remains in the hands of the Saudi government.

As part of its pitch to investors during its share sale, Aramco pledged to issue a $75 billion dividend annually for five years. It is unlikely to renege so soon, despite falling revenues that have caused the company to cut its capital expenditure, analysts say.

Pritish Devassy, an investment analyst at Saudi bank Al-Rajhi Capital, noted that the share of the dividend payout to non-government shareholders would total about $1.3 billion, "which is easily manageable given Aramco's extremely low cost of production and free cash flow."

One variable to look out for is if the royalty payment to the Saudi government could change. Since the kingdom's non-oil revenues have also been blighted by the COVID-19 crisis, Aramco's sovereign transfer is likely to be larger than previous periods. There may also be an additional one-off payment to the government to deal with the extraordinary circumstances, analysts say.

Such a move could mean Aramco has less cash to invest in its own activities.

CAPACITY NEEDS

Last year Aramco booked a net income of $88.2 billion, and free cash flow was $78.3 billion, but the outlook for the rest of 2020 has darkened.

The company has already announced cost-cutting measures this year. However, these savings are unlikely to be enough to totally insulate its balance sheet. In March, the company said capex for 2020 will come in between $25 billion to $30 billion this year, compared to $32.8 billion in 2019.

"The current situation has only deteriorated for the oil market there is a good chance that this could be lower," said Al-Rajhi's Devassy.

However, Aramco's ability to reduce capex to below $25 billion could be limited, given a large part of it is already committed to projects both at home and overseas – such as its recently acquired 20% stake in Reliance Industries' oil-to-chemicals (OTC) business in India.

During the grandstanding that ensued after the collapse of talks with Russia over production cuts in March, the Saudi energy ministry announced it had ordered Aramco to increase its maximum sustained crude oil production capacity from 12 million b/d to 13 million b/d.

Former Saudi energy minister Khalid al-Falih said in 2018 that it would cost Aramco some $20 billion to increase production capacity by 1 million b/d.

But the recent demand evisceration from COVID-19 could prompt a re-think, analysts say. Saudi Arabia has also committed to holding crude production at 8.5 million b/d for May and June and 8.99 million b/d for the second half of 2020 under a global OPEC-led supply accord.

"I wouldn't be surprised if they were to make another announcement on this," said a regional analyst. "Saudi Arabia's decision-making isn't linear and that is important to bear in mind. It is entirely conceivable for it to be shelved again."

However, if the COVID-19 crisis accelerates peak demand, Saudi Arabia's management of the oil market could shift from defending prices to battling for market share. In this scenario, having higher production capacity could provide some competitive advantage. Aramco is already the world's largest single exporter of crude.

The earnings release will be preceded Monday by Aramco's annual general meeting of shareholders.