Aramco to cut capital spending over coronavirus; 2019 profit plunges
Saudi Aramco on Sunday said it plans to cut capital spending in the wake of the coronavirus outbreak, and also posted a plunge in profit for last year, missing forecasts in its first earnings announcement as a listed company. Saudi Arabia’s decision last year to float shares in its state oil company – the most profitable company in the world – was one of the central elements in Crown Prince Mohammed bin Salman’s program for economic and political reform. The record-setting IPO was touted as making the world’s biggest energy exporter more professional and transparent. The 21 per cent decline in net profit for last year means it fell short of analysts’ forecasts for the period that culminated in the share sale, months before the coronavirus pandemic became a factor for oil prices. In recent weeks, Riyadh has announced that it is ramping up production in an oil price war with Russia that has sent global prices plunging and contributed to the coronavirus rout on international financial markets. The company said it expects capital spending for 2020 to be between $25 billion and $30 billion in light of current market conditions and recent commodity price volatility, compared to $32.8 billion in 2019. Aramco has already taken steps to “rationalize” its planned 2020 capital spending, CEO Amin Nasser said in a statement. “The recent COVID-19 outbreak and its rapid spread illustrate the importance of agility and adaptability in an ever-changing global landscape,” he said. Aramco listed its shares in Riyadh in December in a record $29.4 billion initial public offering that valued it at $1.7 trillion. Its shares fell below the IPO price last week for the first time, as oil prices crashed after the collapse of an output deal between OPEC and non-OPEC members. Oil prices have fallen nearly 50 per cent from highs reached in January and had their biggest one-day decline on March 9 since the 1991 Gulf War. Brent crude futures last traded at $33.85 per barrel on Friday, down from about $64 when Aramco listed its shares. CASH FLOW Saudi Arabia’s strategy to gain market share by flooding the markets with cheap oil has revived investor concerns that the profitability of the company would come second to government-led strategies to influence oil markets. “Foreign investors may view recent events as confirmation that the strategic direction of Aramco is driven by its majority shareholder, driven by national development and geopolitics, not simply value maximization of this company’s returns,” said Hasnain Malik, head of equity strategy at Tellimer. Despite a drop in income, Aramco said it paid a dividend of $73.2 billion in 2019 and intends to declare a cash dividend of $75 billion in 2020, paid quarterly. Aramco, which is 98 per cent owned by the Gulf kingdom, reported a net profit of $88.2 billion in 2019, down from $111.1 in 2018. Analysts had expected Aramco to post a net profit of 346.6 billion riyals ($92.6 billion) in 2019, according to an estimate of 15 analysts polled by Refinitiv. Aramco said the drop in earnings was mainly due “lower crude oil prices and production volumes, coupled with declining refining and chemical margins, and a $1.6 billion impairment associated with Sadara Chemical Co.” “Assuming the price of $35 per barrel, Aramco’s revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) could contract by 20-30 per cent compared to our previous forecasts and to the company’s performance in 2018-2019,” said energy analyst Dmitry Marinchenko at Fitch Ratings. Biraj Borkhataria, a London-based energy analyst at RBC Capital Markets, said a $10 a barrel change in prices hits Aramco’s cash flow from operations (CFFO) by $15 billion, while each 100,000 barrels change in output impacts CFFO by $1.1 billion, assuming a price of $60 per barrel. “Lower price more than trumps higher production volumes,” he said. Saudi Arabia has long acted as the global oil market’s swing producer, the only country capable of substantially and rapidly cutting or raising output to match demand and prop up prices. Aramco could easily fund the dividend for minority shareholders, which own 1.7 per cent of the company, even if oil prices slump to $10-$20 a barrel as the share of minorities is about $1.3 billion, said RBC’s Borkhataria. Aramco remains the world’s most profitable company, beating Western oil majors such as Exxon Mobil Corp, and Apple Inc, which made $55 billion in its last financial year that ended in September. Mazen al-Sudairi, head of research at Al Rajhi Capital, said that despite the economic headwinds and low oil prices, Aramco will be able to maintain “good dividends” at a Brent crude price of $40 or even $20 per barrel. Aramco said it had total hydrocarbon production of 13.2 million barrels per day of oil equivalent in 2019, compared to 13.6 million barrels per day of oil equivalent in 2018. Aramco shares were flat at 29 riyals at 0845 GMT, 9 per cent below the IPO price if 32 riyals.
Dip in natural gas price next month to benefit consumers, industries
Bills of natural gas consumers, be it residential or industrial, are set to get lighter with the benefit of lower gas prices expected to be passed on to consumers from April. Apart from individual consumers, reduced gas prices augur well for industries, gas-based power projects and city gas distribution (CGD) companies. Globally, natural gas prices have already plummeted due to the slump in demand consequent to the spread of the COVID-19 pandemic. The price of natural gas in spot markets have halved to around $3-4 per mmBtu, which is almost near its decadal low. Following global cues, the natural gas prices in India are estimated to be cut by a steep 25% from the next month. Based on the current formula for price determination, market estimates suggest that the domestic gas price is likely to be cut to US$ 2.5 per million metric British thermal units (mmBtu) for the six months beginning from April. The gas price was last reduced by 12.5% to US$ 3.23 per mmBtu effective from October 1, 2019. The Centre revises the price of domestically produced gas every six months based on average benchmark natural gas prices in US, UK, Canada and Russia. India’s natural gas requirement is met with both import of liquefied natural gas (LNG) and locally produced gas, mainly by public sector majors, ONGC Ltd and Oil India Ltd. Domestic gas is provided on priority basis for consumption by individual households, transportation (compressed natural gas), fertilizers and power generation among other selected sectors. “After considering operation costs and taxes, one-third of the possible 25% reduction in domestic gas price will be passed on to the consumers. The retail prices of the piped natural gas (PNG) for residential consumers and compressed natural gas (CNG) are likely to reduce by 8-10%,” said people associated with the CGD business. At present, the state-run Gujarat Gas Ltd charges Rs 712.10 (excluding tax) per mmBtu for domestic PNG and Rs 54.70 per kg for CNG in Gujarat. Adani Gas Ltd’s retail price for residential PNG and CNG in Ahmedabad is Rs 686.85 per mmBtu (excluding tax) and Rs 54.82 per kg, respectively. Low natural gas price has brightened prospects for industrial production as well. Ceramics, chemicals and a host of other industries in the state use natural gas as fuel. “We are expecting a reduction of Rs 3-4 per cubic metre in gas price supplied to ceramic tile makers in Morbi as the LNG prices have declined globally,” said K G Kundariya, chairman, Wintel Ceramics Pvt Ltd. Morbi is the largest gas-consuming industrial cluster in India with daily consumption of approximately 6 million cubic meters of gas. “Reduction in natural gas prices will certainly bring down our production costs as natural gas accounts for 35% of the production expenses incurred,” said Mukesh Ughreja, president, Morbi Ceramic Association. Low production cost is expected to help local players become more competitive in the international market and increase exports. “Those who already enjoy a strong position in the market will benefit in terms of better margins and profitability. Those who are trying to gain ground in the market, can do so by lowering their prices,” he added. The ceramic industry faced tough times over the last two years. The low gas prices in the international market and strong possibility of price reduction in the domestic market have provided a much-needed cushion to the industry. “We are expecting a reduction of Rs 5 per cubic meter in prices of natural gas supplied to Morbi ceramic industry. If that happens, Morbi will be able to save Rs 30 million in fuel cost per day,” said Ughreja. The industries in Vapi and Ankleshwar are looking at the rate revision in gas prices after the LNG prices have reduced in the international market. Vapi and Ankleshwar are the hubs of chemicals, dyes and intermediates apart from other industries including glass, paper mills, bulk drugs, pharmaceuticals, etc. “Majority of the gas users in Ankleshwar are small-scale units. There are over 600 small scale units running on natural gas. The fall in LNG prices will benefit small industries including dyes and intermediates, agro chemicals, glass etc. in the region and increase their competitiveness in the international market,” said Mahesh Patel, president of Ankleshwar Industrial Association (AIA). “Reduced natural gas price will bring down the generation cost of gas-based power projects. It will also be beneficial to stranded gas-based power projects as electricity generation from gas-based power plant becomes viable with lower gas prices,” said K K Bajaj, an Ahmedabad-based energy and regulatory expert. Currently, gas-fired power projects with cumulative installed capacity of 3,898MW are stranded in Gujarat for want of gas. According to CRISIL, the viability of Rs 500 billion capital expenditure planned in the CGD space over the next four years across India has improved with the price of liquefied natural gas (LNG) expected to be subdued during the period.
Oil slumps again as coronavirus hits demand and price war bites
Oil fell on Monday as an emergency rate cut by the US Federal Reserve failed to soothe global financial markets panicked by the rapid spread of the coronavirus, while a price war between top producers added to a growing supply glut. Brent crude fell $2.07 to $31.78 a barrel by 0729 GMT, extending last week’s plunge of 25 per cent, which was the largest weekly fall since 2008. The front-month price opened at a high of $35.84 but slipped to a low of $31.63. US crude was at $30.35, down $1.38 after slipping below $30 earlier in the session, losing ground despite US President Donald Trump’s pledge to fill strategic petroleum reserves (SPR) in the world’s largest oil consumer “to the top”. “While helpful on the margin, such (SPR) policy pales in comparison to a coronavirus plagued market that is measured in months or a price war that is expected to last several quarters or longer,” RBC Capital Markets analyst Michael Tran said. With current SPR stockpiles at 634 million barrels, or 80 million barrels less than a nameplate SPR capacity of 714 million barrels, the government buying would clean up only about 20 days of a global overhang that RBC estimates at an imbalance of 4 million bpd, Tran said. The US Fed slashed interest rates to near zero on Sunday in its second emergency cut this month, and said it would expand its balance sheet by at least $700 billion in coming weeks in a bid to ease tension in financial markets. Oil prices have come under intense pressure on both demand and supply sides: Worries about the coronavirus pandemic slashing oil buying persist, while oversupply fears have grown after top exporter Saudi Arabia ramped up output and slashed prices to increase sales to Asia and Europe. Earlier this month, the Organization of the Petroleum Countries (OPEC) and Russia failed to extend a production cut agreement that has been supporting prices since 2016. “Fear remains the crux of the problem here as market players remain unconvinced that monetary policy easing and liquidity injections will solve an essentially healthcare crisis,” OCBC Bank’s economist Selena Ling said. “The end-game to me remains not about more policy bazookas, but a peak in global COVID-19 infections and fatalities, and, or a COVID-19 vaccine cure on the horizon.” Despite the massive drop in both oil and natural gas prices last week, the US oil drilling rig count rose for a second week in a row to its highest since December, energy services firm Baker Hughes Co said in its closely followed report on Friday. The number of rigs is expected to fall, however, as producers deepen spending cuts on new drilling. More pain will be felt by US producers as Brent’s premium to WTI is close to its narrowest since 2016, making US crude oil uncompetitive in international markets. Exports are set to fall by 1 million barrels per day each in April and May, sources have said. “The big loser will be US shale, where the Republican government will possibly face a bailout decision on a heavily indebted industry sooner rather than later,” said Jeffrey Halley, a senior market analyst at OANDA in Singapore.