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23 March 2021

Coronavirus Fuels Saudi Aramco Earnings Drop

Back in late 2019, oil giant Saudi Aramco underwent an initial public offering (IPO) which valued the company at US$1.7tn. Despite this outstanding valuation, the company has not had an easy year since going public. The Coronavirus pandemic significantly damaged the global economic outlook across a multitude of industries. Sectors such as aerospace and transport, as well as other industries where oil is a direct cost of firms’ business models, suffered substantially. Due to the falling demand for these services, the need for oil also declined considerably, displayed by negative West Texas Intermediate (WTI) oil prices in March 2020.

Falling oil demand was fairly reflected in the earnings report from Saudi Aramco, the Saudi Arabia-based oil firm, which showed a 44% fall in full year earnings compared with 2019, due to the low oil prices and sales volume. The company reported US$49bn in net income for the year 2020.

Regardless, Saudi Aramco seems to be maintaining a positive outlook on the years ahead, the first indication being that Aramco still declared a US$75bn dividend pay-out, while stating it would take on debt to fund this. In addition, the price of Brent Crude Oil per barrel is up around 25% in the year to date and up 73% since this March last year, with analysts expecting a continuous increase. Goldman Sachs analysts forecast an US$80 price target by the third quarter of 2021. The CEO of Saudi Aramco, Amin Nasser, also shed light on the situation by stating that the company is optimistic on economic outlook due to the roll-out of vaccines globally and stating that the demand from China alone is very close to pre-Coronavirus levels.

By no means is Saudi Aramco the only vulnerable oil company to have suffered from the pandemic, with Exxon Mobil, the largest energy company in the United States, reporting its first annual loss in 40 years. However, Saudi Aramco does have a number of unique downside risks associated with its geographical location. The Middle East has been an area of geo-political instability for an extended period of time, most recently displayed by the multiple missile attacks on oil facilities in the region. The missile attack earlier in March this year sent oil prices rising beyond US$70 per barrel due to supply concerns, but for both the missile attack and more recent drone strikes, Nasser emphasised that there were no impacts on the company from the events. The firm has stated that with each attack, its defence and responses to the violence on its facilities continue to improve.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Coronavirus Fuels Saudi Aramco Earnings Drop
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