Saudi Aramco reported a 21 per cent drop in full-year profit due to lower oil prices and production volumes and an impairment charge associated with one of its chemical affiliates, the company said on Sunday.
Net profit for 2019 dropped to $88.2 billion (Dh324bn) from the previous year, while cash flow fell to $78.3bn in the year from $85.8bn in 2018, Aramco said.
“2019 was an exceptional year for Saudi Aramco. Through a variety of circumstances – some planned and some not – the world was offered unprecedented insight into Saudi Aramco’s agility and resilience,” said chief executive Amin Nasser.
Lower crude prices, output volumes, declining refining, and chemical margins, as well as a $1.6bn impairment charge relating to the Sadara Chemical Company, affected earnings, Aramco said.
Aramco is reversing strategy and bringing a record level of 12.3 million barrels per day to the markets in April when a production restriction pact between the Opec+ alliance will end. Saudi Arabia wanted deeper cuts of 1.5m bpd to counter the impact of the Covid-19 pandemic on global oil markets.
Aramco also received a directive from the energy ministry last week to raise its production capacity, currently at 12m bpd to 13m bpd, by an unspecified timeline.
"The production cut presents a new challenge for Saudi Aramco's operations as the increase in production capacity by 1m bpd to 13m bpd required by Saudi government would typically cost $30bn," said Vijay Valecha, chief investment officer at Dubai-based Century Financial.
The capacity increase comes amid revisions to Aramco's capital expenditure guidance for 2020. The company is cutting spending to $25bn from $30bn in 2019 due to current market conditions. Capital expenditure for 2021 and beyond is "currently under review", the company said. Capex for 2019 was $32.8bn, 6.5 per cent lower than the previous year.
Mr Nasser acknowledged Aramco's challenges in a new oil price environment, where Brent is trading at half its value from January and closed at $33.85 per barrel on Friday.
“The recent Covid-19 outbreak and its rapid spread illustrate the importance of agility and adaptability in an ever-changing global landscape," he said. "This is central to Saudi Aramco’s strategy and we will ensure that we maintain the strength of our operations and our finances. In fact, we have already taken steps to rationalise our planned 2020 capital spending."
Aramco, however, still had resilience, added Mr Valecha citing the 18 per cent drop in share prices of the company in comparison with the 50 per cent drop in crude oil amid the outbreak of the coronavirus and the failure of Opec to extend production cuts.
Aramco will pay out $3.9bn in dividends on March 31 to shareholders registered as of March 18. The company also plans to declare aggregate cash dividends of $75bn, to be paid quarterly this year - subject to the board's approval. Aramco, which produces one in every eight barrel of oil globally, reported dividend payments of $73.2bn in 2019.
The company, from a balance sheet perspective, still has "very solid credit" to pay out $75bn in cash dividends this year, according to a prominent industry executive who wished to remain anonymous.
"They may not actually earn $75bn in profit next year but they would still pay it out because they've got sufficient balance sheet spreads to either generate internally or borrow from external sources," the analyst said.
Saudi Aramco, which sits on the second-largest reserves of crude in the world, is also expected to focus its capex on raising domestic capacity rather than pursue downstream investments abroad, as a result of its revision in planned spending for this year.
Aramco will need to shift gears and a viable solution is to scale back investments of downstream, in order to give immediate priority to what they call the maximum sustainable capacity, said the analyst.
Saudi Aramco plans to raise its refining capacity to 8-10m bpd by 2030 — of which 2-3m bpd will be converted into petrochemical products — up from 4.9m bpd. Saudi Aramco also acquired 70 per cent stake in Sabic, the region's biggest petrochemical firm last year for $69bn as it looks at developing specialty chemicals to widen its interests.
Total hydrocarbon production in the world's third-largest producer after the US and Russia averaged 13.2 million barrels of oil equivalent per day.