Aramco’s Q2 2021 results — the Saudi crown jewel defies analyst’s forecasts

The Saudi oil giant has again exceeded expectations helped by a combination of external factors and management decisions that will impact future cash flow proceeds.
The external factors include a relatively stable market with higher oil prices due to the Kingdom’s key role in OPEC+ quota allocation to avoid market price volatility.
Saudi Aramco on Sunday announced its second quarter 2021 financial results, reporting a 288 percent increase in net income as compared to the same quarter of the last year to $25.5 billion and declaring a dividend of $18.8 billion. The first quarter dividend of $18.8 billion was paid in the second quarter;  Q2 dividend of $18.8 billion is to be paid in the third quarter on Sept.1, setting to rest worries that the promised annual dividend payment of $75 billion until 2023 might be reduced.
The company’s net income for the first half of the year was $47.2 billion, representing a 103 percent increase over the same period in 2020.
Dividend payments will be covered by cash flow this year without taking into consideration the cash flow generated from noncore business asset sales.
Aramco announced its cash flow from operating activities: $30.1 billion (Q2) / $56.5 billion (H1) and free cash flow was $22.6 billion in the second quarter and $40.9 billion for the first half of 2021, compared to $6.1 billion and $21.1 billion, respectively, for the same periods in 2020. Combined with proceeds from the company’s planned partial privatization of oil and natural gas pipelines, any excess free cash after dividends may be used to reduce its debt, which has recently risen after successful international borrowings with Aramco’s leverage sitting at 23 percent, at end of 2020 above its target range of 5-15 percent. Even on this possible negative issue raised by analysts, there was good news, as the gearing ratio was reduced to 19.4 percent (June 30) compared to 23 percent at end of 2020.
Capital expenditure was $7.5 billion in the second quarter and $15.7 billion for the first half of 2021, representing an increase of 20 percent and 15 percent, respectively, compared with the same periods in 2020 and again setting to rest another area of concern to analysts that the dividend payments would cut back on Aramco’s capex programs, by demonstrating the company’s ability to mobilize capital to target growth opportunities, and the consolidation of SABIC’s capital expenditure.
At the same time, the company maintains a highly disciplined and flexible approach to capital allocation, and continues to expect its 2021 capital expenditure to be about $35 billion.
According to Aramco CEO Amin Nasser, given the positive signs for energy demand in 2021, there are more reasons to be optimistic and feel that better days are coming. Is he being realistic and what other factors are assisting Aramco to ensure continued outperformance of their financial results against leading analysts?
Assessing the latest Aramco financial results in isolation will only provide a partial picture of other major management initiatives being undertaken, which could significantly add to Aramco’s bottom line profitability and investor appeal, especially if another partial IPO stake sale is considered. This involves a rethink about Aramco’s noncore assets and their leverage. The company created a new team to review its assets last year, soon after the coronavirus pandemic triggered a plunge in energy prices and strained its balance sheet with Aramco successfully raising $12.4 billion by selling leasing rights over oil pipelines to a US-led group of investors in April. Aramco closed the transaction with an international consortium that acquired a 49 percent stake in the newly formed Aramco Oil Pipelines Co., in which Aramco remains the majority shareholder. Under a 25-year lease and leaseback agreement, Aramco Oil Pipelines Co. will receive a tariff payable by Aramco for stabilized crude oil flows, backed by minimum volume commitments. This investment demonstrated investor confidence in the company’s long-term outlook and taking on Aramco risk.

Another criticism is that Aramco might have to raise its current $75 billion per year dividend payout yield from roughly 4 percent to above 5 percent in line with IOC peers such as BP, Chevron, and Exxon Mobil.

Mohamed Ramady

To send out the message that this was not a one-off transaction, Abdulaziz Al-Gudaimi, Aramco’s senior vice president for corporate development, advised that such sales will continue in the next few years, “irrespective of any market conditions” and Aramco aims to generate “double digit billions of dollars, and that it’s a strategy meant to create value and create efficiency, and not about a specific capital target or financing the dividends of the company.”
According to media reports, Aramco is planning to sell a stake linked to its natural gas pipelines and it has subsidiaries and units involved in several other industries. They include power plants, an aviation company, shipping manufacturing yard, a real estate arm and an insurance firm.
International investor confidence was aptly demonstrated in other ways too when the company raised $6 billion through the sale of US dollar-denominated Shariah-compliant securities to leading institutional investors. The issuance comprised three tranches of direct and unsecured sukuk trust certificates issued under Aramco’s newly established International Sukuk Program with the offer oversubscribed to reach $60 billion. Funds raised were allocated for general corporate purposes. 
Given climate change and fossil fuel debates, Aramco continues to focus on its downstream petrochemical operations and in a move that represents a significant step in SABIC becoming Aramco’s chemicals arm, Aramco is transferring the marketing and sales responsibility for a number of Aramco petrochemicals and polymers products to SABIC, and the offtake and resale responsibility of a number of SABIC products is being transferred to Aramco Trading Co. (ATC). These changes are intended to help SABIC focus on polymers and derivative products while ATC focuses on fuels, aromatics and MTBE, driving further operational efficiencies, strengthening the brands of both companies and improving overall competitiveness.
Considerable synergies are being captured, mainly in procurement, supply chain, feedstock optimization, stream integration, operations and maintenance. The results will be seen in future cost savings and higher consolidated company profitability.
Aramco has also opened up the opportunity for both domestic and international partners to participate in its newly launched Shareek  program. This initiative, which means “partner” in Arabic, will enable the state-backed oil giant and Saudi petrochemicals firm SABIC, among other large domestic companies, to lead investments into the Saudi private sector worth SR5 trillion ($1.3 trillion) by 2030, by reducing dividends paid to the government. The initiative’s goal is to help the Kingdom diversify its economy.
With all these positive developments taking place, will there be an interest in a further tranche of Aramco IPO share sales?
The outlook is encouraging as it will most likely be completely underwritten by either a Chinese or Indian energy partner, most likely the former, to ensure that energy supplies from the Kingdom are assured over many years, especially from  countries that are still not fully committed to a  sharp fossil fuel reduction in their economic growth plans. Another criticism is that Aramco might have to raise its current $75 billion per year dividend payout yield from roughly 4 percent to above 5 percent in line with IOC peers such as BP, Chevron, and Exxon Mobil. This again is a fallacy, as these IOC’s are facing very nervous shareholders who are prompting the companies to divest from fossil oil production into other activities and at the same time are being rewarded with higher dividend payouts to keep them on board.
Aramco does not need to follow suit as the Saudi energy giant is not BP or Chevron but a truly diversified upstream and downstream energy and manufacturing giant, and has launched renewable energy megaprojects, and the Public Investment Fund will increasingly turn to international capital markets to borrow in its own name to invest in higher yielding international and domestic projects, getting average returns of more than 7 percent, thus making the PIF less reliant on Aramco’s dividend payment and cutting the $ 5 billion dividend  to retarget it to more domestic Saudi government investments. 

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran, and author of “Aramco 2030: Post IPO Challenges.”