Collapsing world oil prices, paltry oil demand, and COVID-19 together delivered a 25% hit to Saudi Aramco's net profit in the first quarter of the year. The worst is yet to come, however, as Aramco expects worse results in Q2.
The world's most profitable company reported a plunge in net income to $16.6 billion during the first quarter compared to $22.2 billion year-on-year. Aramco said the profit plunge primarily reflects "lower crude oil prices, as well as declining refining and chemicals margins and inventory re-measurement losses."
Analysts said the full effects of the COVID-19-induced demand crisis and demand shock on Aramco will become more apparent in the second quarter.
"The Covid-19 crisis is unlike anything the world has experienced in recent history and we are adapting to a highly complex and rapidly changing business environment," said President and CEO Amin Nasser. "Aramco has demonstrated resilience during economic cycles and has an unparalleled position due to a strong balance sheet and low-cost structure."
Cash flows from operating activities stood at $22.4 billion as against $24.5 billion for the same period in 2019. Aramco said free cash flow was $15 billion compared to $17.4 billion in Q1 2019. Aramco maintained its oil output at 9.8 million barrels per day during Q1 under the OPEC+ supply cut pact agreed to in April.
On Monday, Saudi Arabia said it would increase production cuts in June beyond its quota to help slash a massive supply glut. The expected reaction was to increase crude oil prices.
The cut will see Saudi Arabia produce 4.8 million bpd less than the 7.492 million bpd produced in April, its lowest in 20 years. The United Arab Emirates and Kuwait also announced further production cuts, following Saudi Arabia's example.
Aramco said its results reflected lower oil prices, declining refining and chemical margins, and "inventory re-measurement losses".
"Looking ahead to the remainder of 2020, we expect the impact of the COVID-19 pandemic on global energy demand and oil prices to weigh on our earnings," said Nasser. "We continue to reinforce the business during this period by reducing our capex and driving operational excellence. Longer-term we remain confident that demand for energy will rebound as global economies recover."
Aramco expects capital spending for 2020 to range from $25 to $30 billion. Capital expenditures for 2021 and beyond are being reviewed. Q1 capex stood at $7.4 billion compared to $7.2 billion, said Aramco.
Aramco's gearing (or net debt divided by balance sheet capital) was minus 4.9% at end-March, down from minus 0.2% on Dec. 31, 2019 and reflecting the strength of the company's balance sheet.
