Saudi Aramco is cutting planned spending this year, in the first sign that the oil-price war the kingdom unleashed is hitting home.
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The oil giant is lowering that range from the planned $35 billion to $40 billion announced in its IPO prospectus, and compared with $32.8 billion in 2019.
“We have already taken steps to rationalize our planned 2020 capital spending,” chief executive officer Amin Nasser said. Given the impact of the coronavirus pandemic on economic growth and demand, Aramco is adopting “a flexible approach to capital allocation,” he said.
Discounted pricing to markets already reeling from weak demand and crude that lost roughly half its value since the beginning of the year threaten a further hit to revenue.
The shares fell as much as 0.5% on Sunday, extending the decline this year to 18%. Aramco’s market value has declined from a peak of over $2 trillion in December to about $1.5 trillion.
The coronavirus’ knock-out blow to oil use has overwhelmed OPEC’s initial optimism on demand this year, with analysts now expecting a drop in consumption. The OPEC+ group’s failure on March 6 to agree on further cuts is only exacerbating a glut as buyers search for storage tanks and vessels.
Saudi Arabia, Russia and others intend to boost production once the current accord to lower output expires in March. The kingdom pledged to supply 25% more oil in April than it produced last month, and Wednesday ordered Aramco to boost output capacity by 1 million barrels a day.
Key 2019 numbers:
Oil prices fell last year even as Saudi Arabia trimmed output as part of efforts between OPEC and other producers to rein in production. Drone and missile attacks on two of its biggest facilities in September temporarily slashed production by more than half, but didn’t cause a big surge in prices.
Brent crude averaged $64.12 a barrel in 2019 compared with $71.67 the previous year. Saudi production slipped to an average of 9.83 million barrels a day from 10.65 million in 2018, according to data compiled by Bloomberg. Aramco restored output to pre-attack levels by early October.
Aramco reiterated its plan to pay $75 billion in dividends this year. The company needs to balance its pledge to pay investors with spending on its upstream projects – maintaining oil production and expanding fields – and boosting its global refining and chemical operations, the downstream segment of the business.
“Aramco can restructure the strategy to concentrate more on the upstream expansion rather than downstream,” said Mazen Al-Sudairi, head of research at Al Rajhi Capital. “They can do it easily from their cash flow. But it might affect the money transfer to the government for one or two quarters.”
Aramco’s 2018 net of $111 billion made it by far the world’s most profitable company, exceeding the combined incomes of some of the world’s biggest companies including Apple Inc., Samsung Electronics Co. and Alphabet Inc.
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