Saudi Aramco’s Profit Drops, Hit by Lower Oil Prices, Output

Saudi Arabia’s national oil company posted a 38% drop in quarterly profit due to lower energy prices and production cuts, but boosted its dividend by more than half—highlighting the kingdom’s dependence on oil revenues.

Saudi Arabian Oil Co. , known as Aramco, said Monday that its net profit fell to 112.81 billion Saudi riyals, roughly $30.08 billion, for the quarter ending June 30, from $48.44 billion in the same period last year when it benefited from soaring oil prices after Russia invaded Ukraine.

The second-quarter profit, which came slightly above the $29.8 billion expected by 15 analysts in an Aramco-provided poll, is the third-largest percentage drop in income for the company since it went public in December 2019. The previous large falls in quarterly profits came in 2020 when oil prices slumped amid the Covid-19 pandemic. Aramco is one of the most valuable companies globally, with a market cap of about $2 trillion, briefly capturing the top spot from Apple last year.

Oil prices were trading at lower levels earlier this year amid fears that a slowing global economy would crimp demand and due to a gusher of cheap Russian crude supplies. Aramco’s profit was also affected by weakening refining and chemicals margins, the company said.

Brent crude, the international oil benchmark, has risen firmly back above $80 a barrel after jumping 13% in July, its biggest monthly gain in a year and a half. It was up 0.7% at $85.91 Monday.

Aramco said its total dividend payout would be $29.4 billion for the second quarter, including a performance-linked portion, up from a regular dividend of $18.8 billion a year earlier amid a move by international oil companies to boost payouts to shareholders even as profit declined. Aramco, majority-owned by the Saudi government, said in May it would introduce an additional dividend tied to its annual financial performance, basing it on the company’s free cash flow.

Aramco’s dividend commitment has been a key source of funding for the Saudi government and a bellwether for energy investors—a large, recurring payout the company promised to make to lure investors to its long-delayed initial public offering in 2019. The company is in talks with banks to raise cash by selling more shares through a secondary listing, people familiar with the matter say. Neither Aramco or the government have commented on the plan.

Free cash flow fell to $23.16 billion from $34.61 billion in the previous year, the company said.

Aramco’s free cash flow is still strong, said Robin Mills,

Still, the decision to boost dividends raises questions about whether the oil giant can balance the needs of its main shareholder with the investment requirements of a listed company.

Net income for the first half of the year fell nearly 30% to $61.96 billion from the same period last year as a result of lower crude-oil prices and weakening refining and chemicals margins.

Profits for global oil companies have dropped by about half from a bumper 2022, when Russia’s invasion of Ukraine sent oil and gas prices soaring. Aramco’s shares, which have risen more than 10% this year, were up 1.1% Monday to $8.70 each.

In March, Aramco reported a record annual profit of $161 billion in 2022, the largest ever by an energy firm, cementing the kingdom’s dominance as the world’s most important oil producer.

The oil boom in part fueled Saudi Arabia’s willingness to pursue foreign policies and economic interests that were often at odds with the U.S. Last year, the kingdom—which is the de facto leader of the Organization of the Petroleum Exporting Countries—rebuffed U.S. requests to pump more oil to help tame surging crude prices.

Riyadh on Thursday said the kingdom would extend a production cut of 1 million barrels of oil a day into September, after reducing output by the same amount in July and August in an attempt to prop up prices. The decision shows how Saudi Arabia is willing to take unilateral action that could benefit it.

As OPEC’s biggest exporter, Saudi Arabia wants to keep oil prices at the levels it needs to fund Crown Prince

Prince Mohammed, the kingdom’s day-to-day ruler, has embarked on an expansive development drive at home, launching projects so big that the Saudis call them gigaprojects. As oil prices hit $100 a barrel last year following Russia’s invasion of Ukraine, the kingdom accelerated those efforts.

Saudi economic advisers in recent months have privately warned senior policy makers that the kingdom needs elevated oil prices for the next five years to keep spending billions of dollars on projects that have so far attracted meager foreign investment. Analysts estimate the kingdom needs to keep prices above the $80-a-barrel level to finance the crown prince’s economic overhaul plans.

The Gulf has had oil booms before, when crude prices rose above $100 a barrel and monarchs invested billions of dollars in white-elephant projects that were never completed and handed out cash to citizens to buy support. When prices crashed in the past, Saudi Arabia introduced austerity measures. This boom is different, officials and economists say, as it comes as some Gulf countries move to liberalize their economies.

Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said recent data indicated the Saudi budget has fallen into deficit for a third consecutive quarter and the government is clearly trying its hardest—with the dividend payouts—to ensure that the slump in oil earnings doesn’t impact its fiscal plans.

It remains unclear how the unilateral production cuts will eventually impact Saudi revenues. While oil prices have risen to a three-month high, the cut has taken Saudi Arabia’s output to 9 million barrels a day, a level that is the lowest since June 2021 and rarely seen in the past 10 years.

Saudi oil exports were already down by almost 40% in May from the same period a year ago, recent data from the kingdom’s General Authority for Statistics shows. The value of oil exports declined to about $19.2 billion in May from $30.8 billion last year, the authority said.

The International Monetary Fund last month cut its 2023 growth projection for Saudi Arabia to 1.9%, from almost 9% in 2022, on prolonged production cuts.

Saudi Aramco raised its official selling prices for September for all regions except North America, with the highest increases targeting grades bound for northwest Europe. The rises were expected despite a request by several Asian refiners for Aramco to roll over or cut the OSP differentials, following two consecutive months of increases for most of its grades.

Write to Summer Said at [email protected]