Saudi Arabia’s cabinet has appealed to OPEC+ countries to cut oil production further and thereby stabilise global crude markets.
The state news agency (SPA) noted: “The Kingdom of Saudi Arabia's initiatives aim at urging the countries participating in the OPEC+ agreement and other producing countries to adhere to the cut rates and to provide more reduction in production in order to contribute to restoring the desired balance of the global oil markets.”
When OPEC ally Russian refused in March to undertake additional action to counteract the plunge in oil demand from China due to Covid-19, a full price war broke out. This in turn resulted in a flooded market and heavy losses for a number of world famous energy companies.
Foremost in Saudi Arabia’s thinking will be Saudi Aramco. The state-backed oil firm had its IPO only in December 2019 and is now expected to breach target debt levels.
The most profitable company in the world before the recent oil turmoil, Aramco is burdened with the world’s largest dividend pledge. This, and the acquisition of a major stake in the petrochemical giant SABIC, is forcing the firm to borrow far more than usual.
In comparative terms Aramco is in good health. Whereas Shell (RDSA) cut its dividend for the first time in 75 years and Exxon Mobil (XON) reported its first quarterly loss in decades, the state-backed firm posted a Q1 profit of $16.6bn (£13.5bn, €15.3bn). This figure was more than double the combined profits of its five closest rivals.
In March Khalid al-Dabbagh, the firm’s chief financial officer, outlined his disinclination to further debts but said Aramco had “massive capacity” to borrow. Nonetheless with only $15bn in cash, Aramco was forced to borrow in order to pay its Q1 dividend of $18.8bn.
The sustainability of such action has been increasingly called into question and investors and analysts have noted that Aramco has thus far not ruled out a dividend cut later in this year.
The second quarter of 2020 is expected to be just as painful as the first, if not more so. With the tripling of VAT, the cutting of state allowances and Aramco increasingly burdened with debt, the Saudi Arabian government will hope that its OPEC+ allies will be receptive to their proposals.
In mid-morning Wednesday trading (GMT), Aramco trades up 1.29 per cent at SAR 31.30, while Brent crude oil futures stand down 0.87 per cent at $29.72 per barrel.