Saudi Aramco wants to be more like Exxon and Shell
Saudi Aramco reshuffled its senior management last week and the move was more than just a game of high-level musical chairs at any old energy company.
The national oil company of Saudi Arabia faces an uphill battle to meet promises made before its record-setting initial public offering last year — and before the coronavirus pandemic hit — to deliver a $75 billion dividend payment this year and, presumably, a similar sized payout in 2021. It needs to adapt to meet the challenge.
Aramco is creating a new corporate development organization that will focus on “portfolio optimization,” with a brief to “assess existing assets” and boost access to “growth markets and technologies.” It will be led by Senior Vice President Abdulaziz Al Gudaimi, who now heads up the company’s unprofitable downstream business.
The change, it said, “constitutes a refinement” of Aramco’s existing structure, not a fundamental organizational change. But it does suggest that the company is adapting itself to look more like its private sector rivals such as Exxon Mobil or Royal Dutch Shell
Aramco has never had to worry much about its portfolio of assets before. It developed oil fields in Saudi Arabia, building and operating the infrastructure to process, transport, export and refine its output. And, increasingly, it invested in joint ventures with overseas processors to refine its crude and lock in guaranteed markets.
With huge profits to be made in the upstream sector of the business — finding, producing and selling crude oil — crude prices and production volumes have been the driver of corporate profit across the industry. That model, however, has been turned on its head this year.
Aramco has been hit twice by the pandemic and taken heavier blows than its competitors. First, the collapse in global demand triggered a rout in oil prices, taking Brent crude, the international benchmark, from almost $70 a barrel at the start of the year to below $20 in mid-April. Prices are now back around $45 a barrel, but have been stuck there.
The second punch came from the Saudi-led OPEC+ response that saw the 23-nation group cut production by a record 9.7 million barrels a day in May. That slashed the volume of crude the company pumped by more than 4 million barrels a day, or 35 percent, between April and June.
Aramco’s revenues have taken a battering. Free cash flow slumped to $6.1 billion in the second quarter, but the company maintained its $18.75 billion dividend payment. It had no real option. Its majority owner, the Saudi government, promised that dividend payments in 2020 wouldn’t fall below $75 billion.
Unless the company’s fortunes change dramatically, it will be impossible to maintain those payments without resorting to heavy borrowing. The company is unlikely to get much help from crude prices. Brent is forecast to average less than $42 a barrel this year, rising to $48 next year and $54 in 2022.
And it can’t pump more oil. In this environment, it’s unlikely a simple strategy refinement will be enough. Aramco may have to rationalize what it already does. Earlier this year, it hired advisers for a potential multi-billion dollar sale of a stake in its pipeline business. It may be looking to shed other noncore assets.