Earnings Call: Q2 2020

Aug 10, 2020

Hello, and welcome to this audio webcast discussing Saudi Aramco's Half Year twenty twenty Results. I'm Fergus MacLeod, Saudi Aramco's Head of Investor Relations. And we're joined today by Mr. Amin Nasser, Saudi Aramco's Chief Executive Officer and Mr. Khalid al Debbar, our Chief Financial Officer. Our webcast today will comprise a presentation followed by a question and answer session. We anticipate the entire call lasting around an hour. And I'd like to remind you that this webcast and conference call are being recorded. Before we start, I would like to draw your attention to this cautionary statement. During today's presentation, we may make forward looking statements that refer to estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide. And please also refer to our regulatory filings and website for more details. With that, I'll now hand over the call to our Chief Executive Officer, Mr. Amin Nasser. Thank you, Fergus. Welcome, ladies and gentlemen, and thank you for joining us from all around the world. It is a great pleasure to be with you today. I will start by providing some reflections on how our company has responded to the many challenges that 2020 has brought, including the impact of COVID-nineteen. In the face of the crisis created by the pandemic, I am proud that Aramco has proven its resilience by providing reliable energy supply to the world, even temporarily raising our daily crude production to a historic level of 12,100,000 barrels per day at a short notice. I'm equally proud that we continue to deliver robust financial performance despite reduced demand and lower oil prices. While the crisis brought the world to a standstill, Aramco kept going. Let me outline our response to the unique challenges presented by the COVID-nineteen pandemic. The well-being, health and safety of the company's employees, dependents and their communities and contractors are the top priority for Saudi Aramco. This has been demonstrated and reinforced through the company's response to COVID-nineteen. At the outset of the pandemic, an execution team composed of 2 new dedicated committees was established to ensure the safety and well-being of our employees, our contractors and their communities as well as to maintain business continuity in a challenging environment of increased production and growing uncertainty. We promptly actioned a wide variety of mitigation measures, including communicating with all our international suppliers to preserve the robustness of our supply chain network and to ensure multiple geographical sourcing of materials. We have protected both the health of our employees and communities and our productivity. We are determined to emerge from the pandemic stronger, and we will continue making progress in our long term strategic journey propelled by ongoing investment in 1 of the lowest upstream carbon intensity energy companies in the world. As a result of the COVID-nineteen pandemic, the Q2 has proven to be the most challenging economic period in generations with most industries suffering severe disruptions and significant economic losses, including the energy sector. Our entire industry is still contending with reduced demand and lower oil prices and incredibly challenging global business environment. These strong headwinds are reflected in our 2nd quarter results. The crisis also sharply impacted the share price valuation of many companies in our industry with dividend cuts and in some cases even bankruptcy. We weathered that storm also with our share price performance comparing favorably to other international oil companies. And while it remains unclear how long the current wave of uncertainty will continue, we see growing evidence that the worst of the crisis might be behind us. We are witnessing a partial recovery in the energy market in the second half twenty twenty as countries around the world take steps to ease restrictions and reboot their economies and as readiness for any further wave of COVID-nineteen improves. These challenging times have only strengthened our resolve and determination to be even more agile and disciplined. This is where resilience across oil price cycles is so important. It has allowed us to deliver the highest net income, dividends and total shareholder return amongst major oil companies. It allows us to continue investing in low carbon intensity energy and to support new initiatives such as carbon capture, use and storage. We are accelerating emissions reduction efforts and supporting new initiatives such as the OGCI goal of reducing the average carbon intensity of their aggregated upstream oil and gas operations. The OGCI recently announced a target to reduce emissions to between 20 kilogram and 21 kilogram of CO2 equivalent per barrel of oil equivalent by 20 25 from a collective baseline of 23 kilogram of CO2 equivalent per barrel of oil equivalent in 2017. Saudi Aramco has already achieved an upstream carbon intensity of around half the OGCI target. The company's greenhouse gas emissions were verified by an independent third party. Our resilience has allowed us to adapt to a new normal, putting our people's health and safety affairs by implementing wide ranging precautions to limit the spread of COVID-nineteen wherever we operate and supporting communities and aid agencies around the world through donations and contributions. Our resilience and reliability has allowed us to maintain our preeminence in oil and gas production and as a reliable supplier of energy to the world. We temporarily achieved a historic peak in daily crude oil production of 12,100,000 barrels per day on April 2 without the need for additional capital expenditures. I will now turn over to Khalid to provide more details on our financials. Thank you, Amin, and good afternoon, ladies and gentlemen. Turning now to some key highlights of our performance in the first half of twenty twenty. Despite difficult conditions, Saudi Aramco has demonstrated once again its operational resilience in the face of unprecedented adversity and challenges. Saudi Aramco has also maintained its strong financial position through disciplined capital allocation and resource optimization. As Amin described, COVID-nineteen led to great volatility in crude oil prices and continued pressure on refining and chemicals margin. Crude oil prices and demand both weakened significantly during the first half of twenty twenty. Despite all of this, we have successfully delivered robust earnings. This is due to our low production costs, unrivaled operational and financial strength, our unique scale and our agile workforce. We were able to produce net income of $23,200,000,000 for the first half of twenty twenty. And our free cash flow was $21,100,000,000 for the first half of twenty twenty. This robust free cash flow allowed us to deliver on our plan to maintain a dividend payment of $18,750,000,000 in the 2nd quarter, which followed a declaration of similar amount of dividends in the Q1 of 2020. Focusing now on the balance between the sources and uses of cash, this slide compares half year 2020 with 2019. Sources largely met uses in 2020 as shown above despite the impact of 1 of the worst economic crisis in a century. Balance sheet gearing at the end of the second quarter was 20%, with the increase compared to the 1st quarter level mainly reflecting the deferred consideration of $69,100,000,000 for the SABIC acquisition and the consolidation of SABIC's net debt onto Saudi Aramco's balance sheet. The company is still committed to maintaining our target gearing in a range between 5% 15% across cycles. This strategy and the strength of our balance sheet has immensely helped us in a period during which we executed one of the largest acquisition in the energy industry's history, while simultaneously dealing with 1 of the worst economic crisis in history. And we did all of this while continuing to pay the largest amount of dividend of any listed company on the planet during the first half of a very challenging 2020. Ladies and gentlemen, please let me very briefly reflect and share with you some of the major aspects of the SABIC acquisition, which was completed on June 16, 2020. SABIC is a globally leading and diversified chemical company with manufacturing in the Americas, Europe, Middle East and Asia Pacific. Following the SABIC transaction, Saudi Aramco's chemical business now operates in over 50 countries. The completion of this transaction enhances Saudi Aramco's presence in global petrochemical industry, a sector expected to record the fastest growth in the oil demand in the years ahead. The acquisition transformed Aramco into 1 of the major global petrochemical player, enhancing synergies and procurement. It also optimizes supply chain, manufacturing, marketing and sales. In addition, it also delivers a complementary presence in terms of geography, projects and partners and increases the resilience of cash flow generation. Saudi Aramco has fully consolidated SABIC Financial's results into the financial statement with the completion of this transaction and we have negotiated with the Public Investment Fund a mutually win win sellers financing arrangements. I would now like to review our future capital spending plan, where we are demonstrating both our discipline and flexibility. Saudi Aramco continues to scrutinize its capital spending and efficiency programs and expects capital expenditures to be within the lower end of a $25,000,000,000 to $30,000,000,000 range for 2020. As yet, no one knows the precise impact on economic activities and energy demand from the coronavirus pandemic, especially in the longer term. Our CapEx budget for 2021 and beyond, therefore, remain under review. However, our 2021 capital spending is expected to capital intensity is a great advantage in facing the current challenges. Our upstream capital expenditures of only $4.7 per barrel of oil equivalent produced is the lowest in the industry. Turning to shareholder distribution. Solid earnings built on low production cost, unrivaled operational strength, unique scale and our agile workforce meant that despite continued global economic disruption, Saudi Aramco was able to maintain its planned dividend level by declaring dividends of $18,750,000,000 for the 2nd quarter on top of a similar amount declared for the Q1 of 2020. As previously committed, for the 5 years following our IPO, a dividend prioritization mechanism continues to support public shareholders. I hope you will agree that our results show the robustness of our financial framework, a disciplined and flexible approach to capital and our commitments to value creation. Before I hand back to Amin, I would like to recap the ways in which we are committed to value creation. We have demonstrated resilient financial performance and you can remain assured that it is our ambition to maintain this going forward. We have shown an agile response to an unprecedented and sudden collapse in market conditions. We have delivered on our dividend commitment. Our teams work hard every day and are committed to what makes Saudi Aramco a great and differentiated company. These results, ladies and gentlemen, set us apart from every other major IOC, showing our ability to continue to deliver performance even in the face of unprecedented adversity and are a powerful testament to the value of resilience. Thank you very much, ladies and gentlemen. Amin will now provide his concluding remarks. Thank you, Khalid. In closing, I would like to remind you of our goal to deliver sustainable growth in our free cash flow to support dividends to shareholders over the long term. The 3 pillars of free cash flow growth are shown on this slide, liquids, gas and the downstream. We aim to deliver that growth sustainably by leveraging technology and innovation to optimize our crude and gas production unit cost and by integrating our refining and chemical activities, while at the same time maintaining our low carbon intensity. Our results for the first half of twenty twenty are a testament to the value of resilience. In the face of powerful headwinds created by the COVID-nineteen pandemic, 2020 has seen communities abandoned, economies and industries devastated and each of us forced to adapt to new ways of living and working. These challenging times have only reinforced our determination to make further progress on our long term strategic journey and this is where resilience across oil price cycles is so important. Saudi Aramco is navigating these rough seas with confidence and we believe we are on course to emerge in calmer waters stronger than ever before. Before we end the call, I would just like to say a few words in closing. Aramco has successfully navigated many challenges in its 87 year history. In recent history, the financial crisis and the Asian financial crisis stand out. But this current crisis, which has caused the worst economic downturn since the Great Depression of the 1930s, is by far the toughest challenge the world has ever faced. And it comes after a year of challenges from the attacks on our Abbeg and Khrez facilities last September to the worst pandemic in a century. Despite these challenges, Aramco has kept going and defied the odds. We have continued to safely and reliably provide the world with the low carbon energy needs. We completed the largest IPO in history. We completed one of the largest ever acquisitions in our industry as well. And now we have delivered resilient financial performance and met our dividend commitments. We have been tested like never before and we have delivered. I am confident that we will continue to deliver and come out even stronger after the pandemic is over. At its heart, the confidence is built on the back of our incredibly talented team of people, who ensure that our operations remain safe and reliable no matter what challenge is thrown at them. This coupled with leveraging our cutting edge technology and prudent financial stewardship will lead to better and more prosperous future for the company and its investors. I am optimistic about the company's future, especially as and when the impact of the pandemic fades away and the global economy recovers. Thank you. And thank you, Mr. Nassar and thank you, Mr. Adeban. And of course, the Investor Relations team at Saudi Aramco remain available to follow-up if required following this call. Thank you. Thank you, everyone, and be safe. Appreciate it. Thank you, Brittan. Thank you.