Aramco's Q1 net profit slides 25% on lower oil prices and Covid-19

The world's largest oil exporting company is cutting back output as part of a global alliance

The organisation, headed by serious vice president Abdulaziz Al Gudaimi will begin operation on September 13, 2020..​​​​ EPA

Saudi Aramco, the world's largest oil-exporting company, reported a 25 per cent decline in first quarter net profit because of lower crude prices as well as declining refining and chemicals margins and inventory re-measurement losses.

Net profit for the three months ending March 31 fell to 62.5 billion Saudi riyals (Dh61.2bn/$16.7bn) from the year-earlier period, the company said in a statement on the Tadawul exchange where its shares trade. Aramco's sales for the quarter fell 16.2 per cent to 225.6bn riyals.

The company paid $13.4bn in dividends in the first quarter for the last three months of 2019. It will pay $18.7bn in dividends in the second quarter for the first three months of 2020.

"Not surprisingly, our financial performance in the first three months of 2020 was impacted by the ongoing effects of the Covid-19 global pandemic as well as lower oil prices," Saudi Aramco president and chief executive Amin Nasser said.

"During the first quarter, we took steps to optimise our planned 2020 capital spending while working to identify opportunities to further improve operational productivity," he added.

"Going forward, we retain significant flexibility to further adjust expenditures in response to the disruption caused by the coronavirus on both economic activity and energy demand."

The slide in net profit was "partially offset by a decrease in production royalties, mainly resulting from lower crude prices, and a decrease in crude royalty rates from 20 per cent to 15 per cent, in addition to higher revenue relating to the price equalisation income on gas products," the company said.

Aramco brought a record level of production of 12.3 million barrels per day to the market in April after talks between members of the Opec+ alliance collapsed.

The company has since reversed policy and is cutting back more than a quarter of its production to comply with the Opec+ - G20 output restriction agreement to counter the slump in oil prices from the coronavirus pandemic.

The Opec+ alliance, which Saudi Arabia heads alongside Russia, is cutting back 9.7 million bpd from the markets in May and June, with tapered cuts set to hold until 2022.

Saudi Arabia on Monday pledged to tighten its production restrictions by a million bpd, bringing its output to the lowest in 18 years.

Total production cut would average 4.8m bpd, bringing its total output for June to 7.492m bpd. Crude producers are looking to roll back record production amid a demand crunch from the Covid-19 pandemic, which has forced most countries into lockdowns. Both Riyadh and Moscow will cut from a level of 11m bpd, unlike other producers who will trim output from October levels.

Saudi Aramco's capital expenditure for the fiscal year 2020 is expected to average between $25bn and $30bn, the company said.

"Aramco's results are not as daunting when compared to the other oil majors," said Vijay Valecha, chief investment officer at Century Financial in Dubai.

Royal Dutch shell reported a 46 per cent drop in net profit for the first quarter, while BP’s profit tumbled two thirds and Exxon Mobil posted its first loss in a decade.

Aramco now faces similar challenges to its peers when it comes to striking the "right balance between capex, dividends and debt load," Mr Valecha said.

Spending on upstream activities declined by 2.1 per cent to 20.5bn riyals, the producer said citing optimisation of its drilling programme.

Upstream spending worldwide has taken a hit from the decline in oil prices, which have fallen by 57 per cent in value from the most recent peak in January. US rig counts, for instance, last week fell to their lowest levels since September 2009, according to Baker Hughes data.

Meanwhile, Aramco's capex for its downstream programme, which includes refining and petrochemicals, rose 26.6 per cent to 6.9bn riyals. The company cited continued project development and upgrades at various facilities for the increased spending. Producers in the Gulf are prioritising downstream development to diversify and generate higher-value products since the crash in oil prices in 2014-16.

Aramco, which jointly began producing in the Neutral Zone it shares with Kuwait in February, said it discovered two fields with significant oil and gas reservoirs in the northwest and central parts of the kingdom.

Meanwhile, the Fadhili gas plant reached 2 billion cubic feet per day of gas capacity in the first quarter of 2020, from 1.5 bcfd, and is on track to reach 2.5 bcfd capacity this year.

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