LONDON  - Saudi Aramco is the investment of choice for those who think the oil market is a glass half full. True, U.S. crude futures temporarily turned negative last month, and even after something of a recovery Brent still trades at just $30 a barrel. Even so, the Saudi Arabian oil giant’s first-quarter results suggest at least some players are well prepared.

Chief Executive Amin Nasser is caught in a storm, but he’s at least in a big boat. While Aramco’s earnings dropped by one-quarter year-on-year in the three months ending March 31, the company at least has more cash than debt. If he needed to, Nasser could borrow the entirety of this year’s intended $75 billion dividend and still keep net debt below 20% of total capital, well below UK rival BP’s 36%.

Of course, Aramco’s free cash flow in the second quarter will be a lot lower than the first quarter’s $15 billion, because of falling prices. So will production: the 9.8 million barrels of daily output will fall in June to 7.5 million, after Saudi said it would voluntarily cut more than its original share of a 9.7 million barrels daily reduction by the Organization of the Petroleum Exporting Countries.

The market, though, now looks less dire than it did. Recently, with daily supply outstripping coronavirus-hit demand by 20 million barrels, oil producers faced a seemingly impossible balancing act. The doomsday scenario was that the glut persisted, storage filled up, and producers were forced to shut down their output – potentially sending many out of business.

Although Rystad Energy reckons there could be less than 600 million barrels of crude storage capacity left – only enough to swallow an imbalance on the current scale for 30 days – it also reckons Saudi’s latest 1 million barrel cut to daily output could stop oil overflowing. Meanwhile, recovering demand as economies emerge from lockdown could balance the market in the third quarter, researchers at the Oxford Institute for Energy Studies reckon.

Even if demand stays low, say because the Covid-19 pandemic doesn’t ease off, Aramco’s buffers will help it survive. And if oil prices bump along at their current level – too low for U.S. shale drillers to charge back in – it will pick up market share. That makes Aramco probably the best of a besieged bunch.

 

CONTEXT NEWS

- Saudi Aramco said on May 12 that earnings fell 25% year-on-year to 63.5 billion riyals ($16.9 billion) for the quarter ending March 31, below estimates by analysts who expected a profit of $17.5 billion, according to Refinitiv.

- Aramco said total dividends of $13.4 billion were paid for the fourth quarter of 2019 and that it would distribute a payout of $18.8 billion for the first quarter of this year, in line with a plan to pay an overall dividend of $75 billion for 2020.

- Aramco said free cash flow was $15 billion, compared to $17.4 billion in the first quarter of 2019. Its shares were up 1.3% at 31.30 riyals at 1103 GMT, still trading below its initial public offering price of 32 riyals in December.

- Saudi said on May 11 it would deepen daily output cuts by 1 million barrels in June. The new cuts will bring daily total Saudi production down by around 4.8 million barrels in June versus April. Daily output would then stand at 7.5 million barrels per day, the lowest in almost two decades.

- Brent crude was trading at $30.13 a barrel as of 1520 GMT on May 12, up 3.3%.

 

(Editing by John Foley and Amanda Gomez) ((george.hay@thomsonreuters.com; Reuters Messaging: george.hay.thomsonreuters.com@reuters.net))