Shares in Saudi Arabian Oil Co., to give the company its full name, closed on Tuesday 2% below where they floated in December. You remember December, right? Possibly it’s the last time you had a haircut or felt completely safe getting on a plane.
It just so happens that on the same day Aramco (SE:2222) released its first-quarter results, BP (NYSE:BP) Plc’s new CEO Bernard Looney was quoted in a Financial Times interview saying he couldn’t rule out the possibility Covid-19 had ushered in peak oil demand. Now that’s BP, you might say, which is a fraction the size of Aramco and has just announced a big peak-oil-demand-ish long-term strategy.
Certainly, the numbers just released by Aramco adhere to the usual Ozymandian scale. Free cash flow of $15 billion for the quarter is roughly the same as BP’s for the past three years. Return on capital of 26%, down significantly from a year ago, is what the oil majors used to earn at the height of the supercycle. While balance-sheet pressure has driven BP’s dividend yield north of 10% and pushed rival Royal Dutch Shell (LON:RDSa) Plc to cut its dividend, Aramco is sitting on net cash.
That other Big Oil stalwart, Exxon Mobil Corp (NYSE:XOM)., has tried to stick to its guns on investing heavily for long-term oil and gas growth. But its stock has suffered enormously as a result. Aramco’s status as Bigger Oil, low costs and state backing make it much easier to maintain a similar strategy and outlook — but then so does having a stock that exists in a bubble.
While Aramco’s first-quarter results are robust, it’s worth remembering the worst of Covid-19 from an oil-market perspective hit in April, at the beginning of the current quarter. The Saudi-Russian price war, in which Aramco is a front-line combatant, also only got underway toward the end of the first quarter and then got subsumed in the pandemic.
Aramco’s crude oil production averaged 9.8 million barrels a day in the first quarter. Guidance suggests it could drop to an average of 9.1 million this quarter, running below 7.5 million in June. Brent crude, meanwhile, has averaged $27 so far this quarter versus $51 in the last. More than usual, the latest numbers are a sepia-tinted snapshot of the past.
Things have moved on in a few short months. Why else has Saudi Arabia imposed austerity measures and decided to cut production even further than promised in June? As I wrote here last month, the government’s take from Aramco might fall by half this year — and that’s only one way in which Saudi Arabia’s world is changing. Why else are reports emerging of the acquisition of Saudi Basic Industries Corp. being restructured (again)? The latter, by the way, would surely have come up on the earnings call, if only there had been one (there were no details in the report).
Since the end of February, average daily volume in Aramco’s shares has been all of 0.3% of the float — 0.3% of 1.5% of shares outstanding. Lock-ups entitling retail investors to bonus shares expire in about three weeks; it will be interesting to see if that has any impact. But Aramco’s IPO was stage-managed precisely to shield the stock from the outside world. Given what’s happened in the outside world, a call might just spoil that.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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