Saudi state oil giant Aramco reported a stunning 288% increase in net income to $25.5 billion for the second quarter, while maintaining its dividend of $18.8 billion, as big oil benefits from higher prices and a recovery in worldwide demand.
Aramco’s net income of $25.5 billion for the quarter compares to $6.6 billion in the same quarter of 2020. The result beat expectations, with analysts expecting a median net income of $24.7 billion for the quarter.
“Our second quarter results reflect a strong rebound in worldwide energy demand and we are heading into the second half of 2021 more resilient and more flexible, as the global recovery gains momentum,” Aramco president and CEO Amin Nasser said in a company statement published Sunday.
Aramco said net income for the first half of the year was $47.2 billion, compared to $23.2 billion in the first half of 2020, representing a 103% increase. The company said the results were supported by the global easing of Covid-19 restrictions, vaccination campaigns, stimulus measures and accelerating activity in key markets.
“While there is still some uncertainty around the challenges posed by Covid-19 variants, we have shown that we can adapt swiftly and effectively to changing market conditions,” Nasser said.
Aramco said 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.
This is significant, because free cash flow has now risen above the quarterly dividend of $18.75 billion for the first time since the start of the pandemic. Aramco already pays the world’s largest dividend, but the improving outlook has prompted some analysts to call for higher payouts.
“A dividend increase is needed to stay competitive,” BofA analysts said in a research note ahead of the earnings release. “Higher oil prices and OPEC+ driven production increases should support a significant free cash flow increase over the next couple of years,” it added.
Aramco responded by saying its dividend is staying at the “normal level” for the quarter, but it would “advise later” as to whether it would stick to the current payout plan.
“We are looking at our sustainability program,” Nasser told CNBC on Sunday’s earnings call. “A lot of the elements of our capital program that we are currently considering have to do with crude-to-chemical and hydrogen, and all of these programs represent great opportunities, especially with the Shareek program,” he added.
Aramco, which is majority-owned by the Saudi Arabian government, is a key source of revenue for the kingdom. “All of this will be reviewed with our board, and we will decide at a later date regarding any additional dividend distribution,” Nasser said.
Oil prices have surged around 40% in 2021 to around $70 a barrel, prompting big oil rivals BP, Chevron and Royal Dutch Shell to hike dividends and launch share buyback programs.
“Our expectation is that the recovery will continue,” Nasser said. “We are seeing more openings of economies, and we expect by year-end the demand will be around 99 million barrels… and 100 million barrels next year as a forecast for total demand,” he added.
Aramco also said it reduced its gearing ratio — essentially the ratio of how much the company is funded by debt versus funded by shareholder equity — to 19.4% on June 30, down from 23% on December 31, 2020. The decrease was primarily due to higher cash and cash equivalents and stronger operating cash flows, as well as proceeds in connection with Aramco’s recent crude oil pipelines transaction.
“Our historic $12.4 billion pipeline deal was an endorsement of our long-term business strategy by international investors, representing significant progress in our portfolio optimization program,” Nasser said.
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% and 15%, respectively. Aramco said 2021 capital expenditure was expected to be approximately $35 billion.
Saudi Arabia’s Crown Prince Mohammed bin Salman said the kingdom would sell more Aramco shares earlier this year, but the company did not comment on the plans. Aramco also stopped short of commenting on a previously flagged oil-to-chemicals deal with Indian conglomerate Reliance Industries, which was expected to be formalized sometime this year.
“We continue to move forward on a number of strategic programs, which focus on sustainability and low-carbon fuels, maximizing the value of our assets, and advancing our downstream integration and expansion journey,” Nasser added.
“For all these reasons and more, I remain extremely positive about the second half of 2021 and beyond.”