Saudi Arabian Oil Company (2222) Earnings Call Transcript & Summary

Welcome to Saudi Aramco's Q1 2023 Results Call. We'll be holding a question-and-answer session following the presentation. [Operator Instructions] I shall now hand over to Mr. Peter Hutton to begin.

Hello, and welcome to this audio webcast discussing Saudi Aramco's First Quarter 2023 Results. I'm Peter Hutton, Senior Vice President of Investor Relations at Aramco. Our webcast today will comprise a presentation followed by a question-and-answer session, and we anticipate the entire call lasting up to an hour. It gives me great pleasure to be joined today by Amin Nasser, President and CEO; and Ziad Al-Murshed, Executive Vice President and CFO. I would also like to remind you that this webcast and conference call are being recorded and 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. Please also refer to our regulatory filings and website for more details. And with that, I now hand the call over to Amin.

Thank you, Peter, and welcome, everyone, and thank you for joining us today. In the last couple of years, we have increased the dips and frequency of engagement with the investor community in various ways. We have held one-to-one meetings, participated in investor conferences and we also held an Investor Day in March this year. We are now moving to conduct quarterly earnings calls, and so you can expect more engagement from us going forward. Moving on, I will provide a brief overview of our progress in the first quarter. Ziad will then take you through our strategic developments in more detail of our operational and financial performance, and he will be sharing the company's intention to introduce a mechanism for performance-linked dividends, which we have announced this morning. Overall, the company continued to deliver strong performance in the first quarter. Operationally, we continue to deliver high reliability and low cost of production. Financially, we continue to generate strong earnings and cash flows, further administrating our ability to deliver through oil price cycles. Our mid- to long-term view of the market has not changed. We continue to believe that oil demand is likely to grow, and we believe that the world will continue to need oil and gas for the foreseeable future to support a sustainable and affordable energy transition. Our concern remains that the industry is not investing enough to meet expected future demand. Our growth strategy remains on track. We continue to move forward expanding our oil and gas capacity in the upstream, and we also made significant progress in our downstream business where we completed a key acquisition in the U.S. and important investment and partnership in China and South Korea. I will now hand over to Ziad to take you through more details.

Thank you, Amin, and welcome, everyone. As Amin explained, we are on track in executing the largest capital program in our history to help meet the world's energy needs and to maximize long-term value for our shareholders. Our capital investment guidance remains at $45 billion to $55 billion. Our upstream expansion plans are on track. We are commissioning the compression project at Haradh and Hawiyah fields, both of which are expected to reach full capacity later this year. We also achieved significant progress in executing our downstream strategy to grow our presence in key markets and to direct up to $4 million. Aramco would supply 60% of the throughput, which amounts to 480,000 barrels per day into a facility that has a significant conversion rate into chemicals in excess of 50%. Second, our joint venture, HAPCO, has broken ground on a new highly integrated refining and petrochemical complex. Our 30% ownership in this JV gives us the right to supply 70% of the throughput, which amounts to 210,000 barrels per day into a facility that also has a very high conversion rate into chemicals of more than 50%. Combined, those 2 investments would see Aramco supply about 700,000 barrels per day of crude oil to high chemical conversion assets in China, which is a major achievement in our downstream strategy. In addition to this, we broke ground on our largest investment in South Korea to develop one of the world's largest refinery integrated petrochemical steam crackers through our affiliate S-OIL. This would be the first commercial deployment of Aramco's thermal crude to chemicals technology developed in collaboration with Lummus. Finally, we completed our acquisition of Valvoline's global product business, which will advance our international lubricants growth strategy and leverage our global base oil production and R&D capabilities. Moving to our operational and financial highlights for the quarter. We generated $31.9 billion in net income and a free cash flow of $30.9 billion. We also paid $19.5 billion of dividends in the first quarter, which is a 4% increase in our base dividend, which we always said would be sustainable and progressive. Since the IPO, we demonstrated the sustainable aspect of our dividend. And in the first quarter, we started delivering on the progressive aspect with this 4% increase. At the same time of increasing the base dividend, we further reduced our balance sheet gearing to negative 10.3%, and we continue to prepay the deferred consideration related to the SABIC acquisition. Having said that, we continue to stress that we are focusing less and less on balance sheet gearing and more and more on maintaining a high investment-grade credit rating across oil price cycles. The execution of our growth strategy is evident in our capital investment, which was about $11.3 billion in the first quarter, including external investments. Our organic CapEx was $8.7 billion, which increased by 15% compared to the first quarter of last year. Our full year capital investment guidance remains unchanged at $45 billion to $55 billion. Looking at the 2 main segments. You can see that the market environment affected the profitability of both upstream and downstream compared to the same period of last year. Upstream EBIT was strong at $57.4 billion, but was about 18% lower than the same period last year, almost entirely in line with the 17% reduction in average realized oil prices. Downstream EBIT was $3.4 billion, which was lower than the same period last year, mainly due to the impact of much lower prices on inventory valuation movements as well as weaker chemical margins, partially offset by stronger refining margins. Finally, on earnings, we realized a financial gain of $1.2 billion pretax from the prepayment of promissory notes relating to the SABIC transaction. ROACE, which we report on a 12-month rolling basis was 29.3%. All in all, strong performance in the first quarter with a robust net income and cash flows and a stronger balance sheet. Now before I get into the specifics of the dividends, let me first emphasize that our cash flow allocation priorities remain unchanged. Our first priority is still sustaining capital to maintain our assets and competitive advantage. Next comes our base dividend, which we always said would be sustainable and progressive. Like I said earlier, since the IPO, we demonstrated the sustainable aspect of our dividend. And in the first quarter, we started delivering on the progressive aspects with the 4% increase in base dividend announced and delivered in the first quarter. Then comes growth investments where we're executing our largest capital investment program in our history. And finally, to use any excess cash for deleveraging or additional distributions or both. Now we have been deleveraging for some time, and now we're comfortable enough to introduce a mechanism that increases dividends in a way that shares the upside depending on company performance. To be clear, our strategy on the base dividend remains intact. We continue our aim to maintain our base dividend as sustainable and progressive. In addition to that, the company intends to introduce a mechanism for performance-linked dividends, targeting 50% to 70% of the group's annual free cash flow net of the base dividend and other amounts including external investments. The amount would be based on the annual results and intended to be distributed quarterly. Having said all of this, it is important to reiterate that dividends are declared at the Board's sole discretion after considering the company's financial position and ability to fund commitments, including growth capital plans and in accordance with the company's dividend distribution policy. With the introduction of performance-linked dividends, we believe that we will have a balanced framework that provides protection on the downside through a sustainable and progressive base dividend that has already been demonstrated even in a severe down cycle, one that shares the upside of our performance with shareholders and all that with strong reinvestment in the business to capture unique high-quality opportunities to create significant shareholder value over the mid- to long term. We believe this combination offers a very attractive proposition to investors. Thank you very much for your attention, ladies and gentlemen, and we are looking forward to answer your questions.

[Operator Instructions] I shall hand now back over to Mr. Hutton.

Thank you, Charlie, and so we'll move straight through to Q&A. We've got several on the line and follow the instructions that were just given if you wish to ask. And I'll pass you back to the operator who can lead us through. Thank you.

Our first question comes from Martijn Rats of Morgan Stanley.

I want to ask you 2 questions. I think the dividend plan is entirely clear. So that was not one of my questions. I want to ask you 2 things instead. I wanted to -- we've been reading a lot about the unconventional gas plants in the country, and I saw Total Energy is being mentioned some of the Chinese companies. I was wondering if you could elaborate on what your plans are in that area? And then secondly -- yes. I'm not quite sure I'm going to get an answer, but I'm going to ask the question nonetheless. There's, of course, an off-flow of Russian oil, particularly in Asia. Going into countries where we would naturally expect the demand growth for oil to be concentrated. And with so much alternative oil, it does strike me that market share of Aramco is under some pressure. Now this might be temporary. But I was wondering if you could reflect on the company's market share position, particularly in India and China. And if to what extent you're still sort of happy with the levels and the trends that they are currently on.

Okay. Thank you, Martijn, for your question. With regard to our unconventional gas, we are developing the Jafurah you know, the largest unconventional project -- that project will bring approximately $2 billion standard cubic feet of gas by 2030. Part of that will also be dedicated for the blue hydrogen project. The good thing about our Jafurah gas, this will bring also approximately more than 400 million standard cubic feet per day of ethane and 630,000 barrels of liquid -- additional liquid. We have already awarded contracts exceeding $10 billion and with the capital expenditure expected to reach $68 million over the next 10 years. So it is a massive project. The upstream bars we are developing. In the midstream bars, we are in discussion with different companies regarding participation in the midstream part of that project. But that upstream part we are conducting on our own. With regard to your second question about Russian barrels, you are absolutely right. There's a lot of Russian barrels heading to Asia. We've seen a big pickup on India. India, at least close to 1.7 million barrels of Russian crude. China is also picking up. [indiscernible] close to 1.2 million, 1.3 million, and there is a [indiscernible] Russian crude going up to China of about 900. However, considering our reliability and customer base and the relations that we have enjoyed with our customers around the world, no impact or placement of our barrels in China or India. As I said, the reliability of 99.7% and attaining 5 type of crudes for new customers when they come pick up their crude and the relations that we have established over the long term with our customers make sure that we are able to place our barrels in spite of this additional barrels from Russian others definitely were impacted in the regions because of the additional Russian barrels.

Our next question comes from Mazen Al-Sudairi of Al Rajhi Capital.

Congratulations for your great results. I have an inquiry. I have an inquiry related to the new dividend policy, for how long did the company plan to have this policy any time horizon? I mean is it 5 years or longer than that?

Thank you, Mazen. The intention is for this to be the mechanism going forward. We intend to do this for the foreseeable future.

Yes, clear. So it will -- as you mentioned, we'll give the upside to relate this and the stock with the upside of the market and the chain development and efficiency of the company.

Absolutely, Mazen. The intent is that we have a base dividend that is sustainable and progressive. It provides protection, if you will, on the downside. And now this mechanism will share the upside with the investors as well. So we think this would provide a good balance going forward. Keep in mind that all of this is at a time when we're heavily reinvesting back into the business in what are very attractive unique opportunities.

Our next question comes from Karen Kostanian of Bank of America Merrill Lynch.

Yes. Gentlemen, congratulations on the new dividend policy. I have a follow-up question about Jafurah. The press has mentioned potential LNG plans, and I know you have been concentrating on blue ammonia. Is this a departure -- are you also looking into LNG opportunities in this very tight market. And my second question comes about we discussed in March during the visit to your facilities, 2 challenges. One was a potential dividend, and second was the liquidity of the stock here. With this move, you solved the dividend question. Is there any plan -- are there any plans to solve the potential liquidity issue with the shares?

Thank you, Karen. I'll take the first question. Ziad will take the second. With regard to Jafurah, definitely, hydrogen is -- low hydrogen is something that we are currently working on. We might expand that even further. And we are looking at opportunities for LNG. Nothing that comes, I mean, firm in terms of constructions or engineering, but we are looking at an opportunity as we have excess gas, and we are exploring what is the potential for expanding our blue hydrogen further or looking at additional demand in the Kingdom or going into LNG. So all of these are currently being evaluated. In addition, we are looking at LNG opportunity outside of Saudi Arabia currently with other partners globally, in the U.S. and in Australia and other parts of the world.

Karen, on your second question regarding liquidity, we recognize that average traded volume compared to a stock of our size is not high. We feel that the new mechanism of market-making in the Tidal Exchange will or should help resolve this. Will continue to do everything that we can to see how this can be resolved. But as you may appreciate, a lot of this is not under the direct control of the company. The -- a lot of the shareholders are holding the shares, and therefore, the traded volume is not too high. So we'll -- we have our eyes on this, and we're trying to figure out how to take best advantage of the market-making regulation that just came in.

Our next question comes from Iyad Ghulam of SNB Capital.

This is Iyad Ghulam. I have 2 questions. The first one is about the downstream. How is the alignment with SABIC and other subsidiaries in regards to the CapEx and operations? And if you can shed some light on the progress of Jafurah field.

Thank you, Iyad. The alignment is going very well. SABIC is considered to be our chemical arm for all the projects that we will be executing when it comes to liquid chemicals conversion, the first big project of 400,000 barrels in Ras Al-Khair was announced by SABIC recently. So in terms of also marketing of our chemical products from our existing assets and future assets when it comes to integrated refining SABIC is handling that. So very well integration going and our plans in terms of achieving $3 billion to $4 billion is going very well by 2025. Actually, well ahead of that plant when it comes to the integration benefits. Now with regard to Jafurah, as I said, we are progressing. We have awarded contracts exceeding $10 billion. The progress is we expect to -- the first increment to come on stream in 2025, and then rub up to reach the $2 billion by 2030.

Our next question comes from Michele Della Vigna of Goldman Sachs.

Congratulations on another very strong set of results. I wanted to ask you a company -- a question around what you're seeing from a demand perspective. As the world's largest energy company, you really feel the pulse of the world energy demand. We are seeing weakening refining margins, especially on the diesel. We still see depressed chemical margins. Are you -- where are you seeing demand weakness in this environment? Or do you think that perhaps the market is overreacting and that the global demand for energy and for oil product remains robust.