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(Bloomberg’s Opinion) – The reorganization of control of Saudi Arabia Oil Co. it’s more than a set of high-end musical chairs in any former power company.
The oil giant is facing a difficult war to deliver on promises made before its record-breaking IPO last year, and before it hit the coronavirus pandemic, to pay a $75 billion dividend this year and, presumably, a giant payment in 2021. You have to adapt to accept the challenge.
Aramco, as the company is widely known, is creating a new business progression organization that will focus on “portfolio optimization,” with a mandate to “assess existing assets” and access to “growing markets and technologies.” It will be led by senior Vice President Abdulaziz Al Gudaimi, who now runs the company’s subsequent unprofitable operations.
The change, he said, “constitutes a refinement” of Aramco’s existing structure, a basic organizational change. But it suggests that the company is adapting to look more like its personal sector rivals, such as Exxon Mobil Corp. or Royal Dutch Shell Plc.
Aramco has never had to worry much about its asset portfolio before. It has developed oil deposits at home in Saudi Arabia, building and exploiting the infrastructure to process, transport, export and refine its production. And, increasingly, it has invested in joint ventures with foreign processors to refine its crude oil and secure guaranteed markets. With the massive profits to be gained in the company’s upstream sector – finding, generating and promoting crude oil – crude oil costs and production volumes have been boosting the corporate benefit of the industry. But, as I wrote here, it’s a style that’s turned upside down this year.
Western oil corporations withstood Storm Covid-19 by cutting dividend payments and, in the case of large European companies, the good fortunes of their advertising, two things that Aramco may not explode.
Aramco twice hit the pandemic and suffered more serious blows than his competitors. First, the collapse in global demand caused oil prices to fall, causing Brent to rise from about $70 a barrel at the start of the year to less than $20 in mid-April. Prices have now returned to around $45 consistent with the barrel, however, they have stagnated there because the recovery call has weakened.
The moment the coup arrived was the reaction of OPEC, led by Saudi Arabia, which saw the organization of 23 countries reduce production to a record 9.7 million barrels, consistent with May. This reduced the volume of crude oil pumped through the corporate by more than four million barrels consistent with the day, or 35%, between April and June. Under the existing terms of the OPEC agreement, production restrictions are expected to remain in effect until April 2022.
Aramco’s income has been affected. Free money fell to $6.1 billion at the time of the quarter, but the company kept its dividend payment of $18.75 billion. There was no genuine choice. Before floating 1.5% of the company’s inventories on the local stock market, its majority owner, the Saudi government, promised that dividend bills in 2020 would not fall below $75 billion.
Unless the company’s fortunes are drastically replaced, it will be to keep those bills without having to resort to large loans. The company is unlikely to get much help from crude oil values. Brent crude is expected to average less than $42 consistent with the barrel this year, emerging at $48 next year and $54 in 2022, according to median estimates from Bloomberg’s commodity value forecast survey.
And you can’t just pump more oil. Aramco production is expected to average nine million barrels consistent with the day for the remainder of 2020, emerging to just under nine.5 million next year under the terms of the OPEC agreement, which remains around 250,000 barrels consistent with the day under what the company pumped. before embarking on its brief production. driven in April.
Before Aramco’s IPO, JP Morgan Chase and Co. he told potential investors in a study report that, as a component of a $40 crude oil “fire test” consistent with the barrel and a production of nine million barrels consistent with the day, close enough to the situation. Corporate faces this year: Aramco would remain within its self-imposed borrowing target by reducing the dividend by 30% and reducing expenses in a component form.
In this environment, an undeniable improvement in the strategy is unlikely to be sufficient. Aramco would possibly have to rationalize what he’s already doing. Earlier this year, he hired advisors for a possible multimillion-dollar sale of a stake in his pipeline business. Possibly he would look to get rid of other non-essential assets. He says he is still involved in a $10 billion refining joint venture in China, and denies having suspended his stake. However, since dividend bills are expected to be a priority, this may not be the time to devote it to a large investment that will not generate profits for several years.
Perhaps because of its resolve not to reduce bills to percentage holders, Aramco’s percentages were much higher than those of its rivals. Its percentage value has fallen by less than 2% since the beginning of the year, with drops of 41% for Exxon and 48% for Shell.
The challenge facing Aramco, however, is how those dividend bills until oil and production costs return to comfortable levels. More active control of your asset portfolio is part of your response.
This column necessarily reflects the perspectives of the editorial board or Bloomberg LP and its owners.
Julian Lee is Bloomberg’s oil strater. Previously, he served as a senior analyst at the Center for Global Energy Studies.
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