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Cautious Saudi Aramco expected to maintain conservative course

Highlights

Saudi oil giant unveils 2020 earnings March 21

Capex cuts expected to endure into 2021

Cheap onshore crude production favored

Dubai — Having already slashed its capex budget and delayed several projects, Saudi Aramco will release its full-year 2020 results on March 21, with market watchers aiming for greater insight on how the state oil giant is emerging from the worst market crash in history.

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Oil prices have largely rebounded to pre-pandemic levels on the back of severe Saudi-led OPEC+ production cuts, but industry sources and analysts say they expect Aramco to continue postponing or even abandoning international projects and more expensive domestic offshore ventures, as it seeks to conserve cash after a fiscally brutal year. Aramco CEO Amin Nasser has said he does not see global demand fully recovering until 2022.

"The lower oil price period will still be felt," said Neil Quilliam, managing director of Middle East-focused consultancy Azure Strategy. "We've already seen a number of projects put on hold or shelved all together."

In addition to unveiling its 2020 fiscal results, Aramco will hold a conference call with analysts on March 22.

In its Q3 results, released in November, Aramco said its profits crashed by 44.6% to $11.79 billion compared with $21.29 billion for the same quarter of 2019, reflecting the plunge in global oil demand due to the coronavirus pandemic.

Its 2020 capex budget was slashed by half, to under $25 billion, and the company, which holds about 12% of the world's crude production capacity, is reportedly planning a similar capex budget for 2021.

Upstream setbacks

Aramco's earnings results are closely watched by the market, given the company's status as the biggest global exporter of crude exporter, as well as its dominant role in Saudi Arabia's economy, which Crown Prince Mohammed bin Salman is attempting to modernize through investments funded by its enormous oil revenues.

Publicly releasing its financials is still a relatively new exercise for Aramco, which in December 2019 listed 1.5% of its shares on Saudi Arabia's domestic stock exchange.

Aramco has pledged to issue a $75 billion dividend annually for five years as part of its pitch to investors, and analysts say this promise is further weighing on its finances and driving its decision to slash capex.

Last March, as the kingdom prepared to launch a price war against Russia in a dispute over OPEC+ production policy, Saudi officials ordered Aramco to expand its crude output capacity by 1 million b/d to 13 million b/d. No timeline for the increase has been given, and with the rift between Saudi Arabia and Russia now patched up and deep OPEC+ production cuts implemented to steward the market's recovery, many of the projects are understood to be on the backburner.

In a recent report, the International Energy Agency noted that expansion of the Marjan oil field has been pushed back two years to 2025 and the Berri field expansion delayed to 2024, while the Zuluf and Safaniya offshore developments are yet to be contracted.

"The priority has shifted towards midstream and downstream and towards cheap brownfield onshore production," said an industry source on condition of anonymity. "Surface projects from currently producing fields are favored, not subsurface projects. The priority right now is not capacity building, it is to sustain production on the upstream."

The source added that low-cost projects to expand Saudi Arabia's giant Ghawar field, the world's biggest, including at the Haradh production area, are being prioritized.

Concerns beyond its borders

A major casualty of Aramco's tumbling profits is its international ambitions.

In recent years the company has initiated several costly deals overseas, but many have stalled, and prospects are dim for any imminent revivals.

For example, US company Sempra said in 2020 it would delay a final investment decision on a 11 million mt/year LNG export facility in Port Arthur, Texas, that Aramco has agreed to take a 25% stake in.

In India, a deal with Reliance Industries for Aramco to pick up a 20% stake in an oil-to-chemicals subsidiary has also been delayed, with the likelihood of closing diminished by the economic impacts of the pandemic, analysts have said.

Aramco is also having to deal with persistent security concerns from attacks on its facilities claimed by Yemen's Iranian-backed Houthi rebels.

Most recently, a drone attack March 7 targeted an Aramco tank farm at the port of Ras Tanura, which exports the vast majority of the company's crude, and on March 4, a missile strike was intercepted in Jazan, where Aramco is readying a 400,000 b/d refinery for commissioning at an unspecified date.

Neither attack resulted in any damage or loss of life, Saudi officials have said. But memories of a successful drone strike in September 2019 on the critical Abqaiq crude processing plant and Khurais oil field, which knocked out half of the company's production capacity, remain fresh.

The security threats may impact investor sentiment should Aramco wish to divest any of its domestic assets to raise cash, which is an avenue it is likely to pursue, Quilliam said. Crown Prince Mohammed has said he intends to sell more shares in Aramco when market conditions are right to fund investments in his economic diversification program.

"The security situation could discount the price of any assets up for sale," Quilliam said. "They can manage the threat but they can't eliminate it."