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Saudi Aramco Q3 profits take a sharp dive

Aramco's dividend payment seems an overreach as the free cash flow available is just $12.4 billion.
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Saudi’s national oil company Saudi Aramco’s financial results for Q3 2020 were lower than expected. Aramco Q3 2020 profits decreased by 44.6% to Riyal 44.21 billion ($11.79 billion), a steep year on year decline from Riyal 79.84 billion ($21.29 billion) for Q3 2019.

The Saudi giant is valued at around $2 trillion. It is expected the pandemic will further escalate the downslide for the oil giant in the coming quarter and the outlook for 2021.

Aramco commits itself to dividends despite bad Q3 results

Aramco has declared that it will maintain its dividend payments of $18.75 billion for the quarter. CEO Amin Nasser stated Nasser stated, “We maintained our commitment to shareholder value by declaring a dividend of $18.75 billion for the third quarter.”

But it seems a difficult number for the company to give out as its free cash flow is $12.4 billion in the third quarter, falling short of its dividend commitment. The current dividend position is, however, based on Aramco’s IPO statement that it will issue $75 billion in dividend annually for five years.

Aramco’s flexibility to curtail its dividend is limited compared to other publicly traded companies such as Shell. Aramco sold just a minuscule stake to private investors on the local Saudi exchange last year. The Saudi government still owns 98% of the company and relies on Aramco dividends for much of its funding.

Aramco indicated that changes in royalties to the government have offset some losses. A decrease in the royalty rate from 20% to 15%, lower income taxes and zakat have benefitted the company.

There has been an increase in revenues due to higher gas product sales. Overall hydrocarbon production for Saudi Aramco Q3 is set at 12.4 million barrels of oil equivalent per day, of which crude oil made up 9.2 million bpd.

The capital expenditure was also reduced to $6.4 billion. For the whole year, Aramco indicated that total capex for 2020 is expected to be at the lower end of the $25 billion to $30 billion range for 2020. This means some projects will be put on ice or delayed.

CEO Nasser stated that “we saw early signs of a recovery in the third quarter due to improved economic activity, despite the headwinds facing global energy markets.”

There will be repercussions of the re-introduction of lockdowns in major markets in the OECD. With a global oil and gas market already shattered by COVID, growing economic instability and a possible widespread recession oil market optimism is not too high.

Weaker refining margins will continue as air traffic and even road traffic will be hit again.

Aramco Trading’s VP Ibrahim Al Buainain said recently that the OPEC+ will have to contend with a “lot of demand issues” before raising supply in January 2021.

If OPEC+ decides to lower production by 2 million in January, more oil is going to be on the market, without clients. And if the smaller OPEC members like Iran and Libya increase production, then the glut is going to increase.

Q4 could be a watershed for Aramco. China is a steady guzzler but its demand is not going to go up.

Aramco will be facing additional pressure from their governments for higher revenues to counter deficits.

IOCs such as Shell, BP, Total or Chevron, are all facing the heat with demand going down.

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