The world’s largest oil and gas company Saudi Aramco released its third quarter results Tuesday, painting a bleak picture for the world’s national oil companies.
Even the Saudi Arabian giant, the world’s most valuable company and leading low-cost oil producer, sitting on a reserve potential of more than 270 billion barrels, faces uncertainty with its finances under pressure.
The current third quarter figures represent for 2020 and 2021 one of the only real periods of breathing room amid a dark period of demand destruction, continuing or re-emerging COVID-19 lockdowns, and a global economy in disarray.
Aramco reported a 44.6 percent decrease of profits for the third quarter (Q3) of 2020, hitting 44.21 billion riyals ($11.79 billion), a steep decline in comparison to the 79.84 billion riyals ($21.29 billion) reported in Q3 2019.
Optimism at present should only be based on Aramco’s ability to counter the major impact of a Black Swan event of unknown order, the coronavirus pandemic, compared to its privately owned compatriots, such as Shell, BP, Total and Chevron.
Overall financials clearly indicate that the sector is facing a much stronger headwind than currently is being indicated by officials from the Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, and some oil analysts.
OPEC+ statements already are being questioned in the market. The seemingly stubborn position taken that the market is improving, fundamentals are going to be healthy very soon, and market demand will be picking up, are contradicted by facts on the ground in the majority of OECD countries.
Europe’s fight with COVID is ongoing, with financial crises and economic recession expected in the next quarters. China’s overall positive outlook is still not based on strong fundamentals. The Asian giant’s continuing demand for crude oil is mainly based on low oil prices and future global demand for Chinese products. The latter could now again be hitting a rock, while low oil prices only are attractive if local markets show demand uptake.
National oil companies (NOCs) have been partly riding out the perfect storm in the oil and gas market, compared to their privately owned competitors, but are now looking at a market situation that is out of their hands. At the same time, the lack of revenues should be worrying the market too, as a stable OPEC+, led by Saudi Arabia and Aramco, is a necessity for future gains.
The stark decrease in revenues is putting the majority of NOCs under severe pressure. For most OPEC countries, the future of the respective country depends on the income of its NOC. Even while overall profitability is still high for some, revenues have plunged, increasing not only government deficits but also the call on the likes of Aramco to keep plugging widening fiscal gaps. Since 2018, government calls on NOCs have increased to contribute or beef up government income. These calls have only accelerated as the pandemic plunges the world into recession.
Aramco’s Q3 financials show only one main underlying issue: the $2 trillion oil giant is fighting an uphill battle to gain control of markets while providing the Kingdom with hard-needed cash influx. It has so far succeeded in the latter, with a willingness to maintain promised dividend levels.
Although Aramco CEO Amin Nasser said the company is committed to paying a dividend of $18.75 billion for Q3, a positive for the Kingdom and investors, there are some clouds emerging on the horizon. With a Q3 free cash flow of $12.4 billion, the dividend could weigh heavy on Aramco’s operations.
The next five quarters (Q4 2020 – Q4-2021) are critical. Taking Aramco as an example for other GCC-based NOCs, such as ADNOC, KOC and NIOC, current markets are not going to give them an easy ride. Should COVID destroy green shoot recovery in Q4 – Q1 2021, as main OECD countries step up lockdowns, Aramco’s current figures could represent the best of several poor quarters.
European stimulus is coming to an end and, with it, a deeper economic crisis that is likely last throughout 2021. Downward pressure on crude oil and petroleum products is more likely to increase than begin showing signs of recovery.
There is some light at the end of the tunnel though, but you need a looking glass to see it.
Global oil and gas firms are cutting back on capital expenditure (CAPEX), and taking an axe to planned investments. Cutting these investments could help keep companies in the green, but it is a double-edged sword. By removing part of CAPEX, not only is future production delayed or put on ice, but current production could also be threatened.
If the likes of Aramco, the biggest pumper of crude in the world, takes a similar risk to the likes of Shell or BP, and become unable to provide enough oil volumes when needed in future, a price hike is imminent.
To counter this optimism however, this situation will likely not arrive for another three quarters, with low oil prices here to stay and perhaps moving even lower than present, with additional volumes on the market potentially pushing prices under $30 per barrel.
Aramco is still the Kingdom’s powerhouse. Currently the Saudi government is budgeting at around $50 per barrel, according to Goldman Sachs, while the fiscal gap is widening, with Aramco straining to provide the plug.
This situation is being played out to a greater or lesser degree across the home countries of NOCs, and should these firms fail to plug the gap, all bets are off.