Saudi Aramco Reports 15.4% Drop in Third-Quarter Profit Despite Maintaining Robust Dividend
Saudi Aramco, the world’s largest oil producer, announced a significant drop in its third-quarter net profit, primarily attributed to lower crude oil prices and weakening refining margins. Despite this downturn, the company maintained its substantial $31.05 billion dividend, underscoring its commitment to shareholder returns even amidst challenging market conditions. This news highlights the complex interplay of global oil markets, geopolitical factors, and Saudi Arabia’s economic diversification strategy.
Key Takeaways:
- Profit Decline: Aramco’s net income fell by 15.4% year-on-year, reaching $27.56 billion in Q3 2024, although still exceeding internal estimates.
- Dividend Stability: The company maintained its substantial dividend of $31.05 billion, demonstrating financial strength.
- Price Impact: Lower average global crude oil prices, from $85 per barrel in Q2 to $78.7 per barrel in Q3, significantly impacted profitability.
- OPEC+ Influence: The continued impact of OPEC+ production cuts, led by Saudi Arabia, contributed to lower crude oil prices.
- Economic Implications: The reduced profits and revised growth forecasts for Saudi Arabia highlight the challenges of economic diversification amidst global oil market volatility
Aramco’s Q3 2024 Performance: A Detailed Look
Aramco reported net income of $27.56 billion for the July-September period, exceeding its internal forecast of $26.9 billion. However, this figure represents a 15.4% decrease compared to the same period last year and a 5% drop from the previous quarter’s $29.1 billion. The company attributed this decline primarily to "lower crude oil prices and weakening refining margins." The average selling price of oil plummeted from $85 per barrel in the second quarter to $78.7 per barrel in the third quarter, reflecting the pressures of increased non-OPEC supply and ongoing OPEC+ production adjustments.
Mitigating Factors and Cost Management
Aramco noted that the year-on-year decline was partially offset by positive cost management initiatives. Specifically, the company highlighted a "reduction in selling, administrative, and general expenses," partly due to gains from derivative instruments and a decrease in production royalties linked to lower crude oil prices and a lower effective royalty rate. This demonstrates the company’s proactive approach to mitigating the impact of lower oil prices. The company’s Earnings Before Interest and Taxes (EBIT), a key measure of profitability, came in at $51.45 billion, down 17% year-on-year.
Dividend Payout and Shareholder Returns
Despite the profit drop, Aramco maintained its considerable dividend. The total dividend of $31.05 billion consisted of a base payout of $20.3 billion and a performance-linked payout of $10.8 billion. This underscores Aramco’s commitment to its shareholders and highlights the strength of its underlying financial position. Major beneficiaries of this dividend are the Saudi government (approximately 81.5% stake) and the Public Investment Fund (PIF, approximately 16% stake). The remaining shares are publicly traded on the Tadāwul stock exchange, following a successful secondary public offering in June 2024.
Broader Market Trends and Geopolitical Context
Aramco’s results mirror a broader pattern among global oil majors. Many companies have experienced similar declines in third-quarter profits due to the intertwined factors of falling crude prices and compressed refining margins. Aramco’s average realized crude oil price dropped to $79.3 per barrel in Q3 2024, compared to $89.3 per barrel in the same period of 2023.
Saudi Arabia’s role as the de facto leader of the OPEC+ alliance significantly shapes the global oil market. The recent decision by a subset of OPEC+ members to delay a planned December output hike by one month further complicates the price dynamics. This decision reflects the ongoing balancing act between maintaining market stability and responding to fluctuating global demand. Saudi Arabia, producing roughly 9 million barrels of crude oil per day, plays a crucial role in this delicate equilibrium.
Impact on Saudi Arabia’s Economy and Vision 2030
Aramco’s earnings directly impact Saudi Arabia’s economy. The substantial revenues generated, even with the profit reduction, remain a crucial component of government funding. These revenues contribute significantly to the ongoing implementation of Vision 2030, Crown Prince Mohammed bin Salman’s ambitious economic diversification plan. Vision 2030 aims to reduce the kingdom’s reliance on oil revenues and develop other sectors of the economy, including tourism, technology, and renewable energy.
However, recent downward revisions to Saudi Arabia’s growth forecasts cast a shadow on the economic landscape. The Ministry of Finance lowered its growth forecast for 2024 to 0.8%, a sharp decrease from the earlier prediction of 4.4%. Furthermore, the projected national budget deficit has increased. These adjustments highlight both the challenges inherent in navigating global economic volatility and the complexities of implementing large-scale economic transformation initiatives, such as Vision 2030. The success of Vision 2030 hinges on diversifying away from oil’s price volatility, a complex effort particularly challenging given current global market conditions.
Aramco’s Outlook and Future Strategies
Despite the challenging market conditions, Aramco’s CEO, Amin Nasser, expressed confidence in the company’s performance. He emphasized that "Aramco delivered robust net income and generated strong free cash flow during the third quarter, despite a lower oil price environment." The company’s continued investment in upstream development, strengthening of its downstream value chain, and advancement of its new energies program reinforce its long-term strategy to adapt to evolving global energy demands.
Aramco’s capital expenditure guidance for 2024 has increased by 20% compared to earlier projections. This increase is likely due to substantial investments in both conventional and renewable energy projects necessary for Saudi Arabia’s economic and energy future. Continued expansion into downstream markets, diversification into new energy investments, and robust dividend payments confirm Aramco’s commitment to a steady growth trajectory despite challenging near-term conditions.
The interplay between global oil prices, OPEC+ strategies, Saudi Arabia’s economic diversification efforts, and Aramco’s corporate performance creates a dynamic and complex scenario. The company’s ability to maintain its dividend amidst falling oil prices highlights the critical role of Aramco in supporting the Saudi Arabian economy and its ongoing efforts towards long-term sustainability and economic diversification. The coming quarters will present critical tests for navigating these challenges and will reveal the ultimate impact of this complex interplay on both Aramco’s performance and Saudi Arabia’s broader economic trajectory.
