Saudi’s Aramco to Cut Capital Spending, Shares Trade Near Record Lows

Saudi’s Aramco to Cut Capital Spending, Shares Trade Near Record Lows
  • Net profit reported at $88.2 billion in 2019, down from $111.1 billion in 2018
  • Analysts expected Aramco to earn $92.6 billion last year
  • Aramco, which is 98% owned by the Gulf kingdom, paid $73.2 billion in dividends for the last year

Saudi oil giant Aramco said it plans to slash its capital spending budget amid low oil prices. The company missed market’s expectations for profit in its first earnings announcement since going public last year.

Fundamental analysis: Profit plunges

Aramco announced a net profit of $88.2 billion in 2019, down from $111.1 billion in 2018, and lower than $92.6 billion expected by market analysts. As expected, the company blamed the low oil prices for a profit miss.

According to the oil giant, a profit miss is due to “lower crude oil prices and production volumes, coupled with the declining refining and chemical margins, and a $1.6 billion impairment associated with Sadara Chemical Co.”

Following lower-than-expected profits for the previous year, as well as taking into account the extremely low oil price today, Aramco will cut planned capital spending for this year.

“The recent COVID-19 outbreak and its rapid spread illustrate the importance of agility and adaptability in an ever-changing global landscape. 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 rationalize our planned 2020 capital spending,” said Saudi Aramco President & CEO Amin H. Nasser.

Despite the lower profits, the company still paid a dividend of $73.2 billion in 2019, while also planning to go ahead with a cash dividend of $75 billion in 2020, despite low oil prices.

“Assuming the price of $35 per barrel, Aramco’s revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) could contract by 20-30% compared to our previous forecasts and to the company’s performance in 2018-2019,” said energy analyst Dmitry Marinchenko at Fitch Ratings.

The state of Saudi Arabia controls a 98% stake in Aramco.

Technical analysis: Stock price trades near lows

Aramco stock price has been moving lower in a continuous fashion for the past three months, since the company went public in December last year. Based on its IPO, Aramco is valued at $1.7 trillion.

Saudi Aramco daily chart (TradingView)

Last week, Aramco stock price printed a record low of $27 amid the oil price war that Saudi Arabia launched against Russia. Given that both Brent and crude oil are trading near the lows, the risk for the Aramco stock price is still very much to the downside.

Summary

Aramco reported lower-than-expected profit figures for last year, with the net profit down 21% compared to 2018. Still, the company paid a dividend of $73.2 billion in 2019, while expecting to pay $75 billion to its shareholders this year.

By Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His passion has given him first hand experience of trading, while his writing means he understands the market forces and wider regulation.
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