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

Welcome to the Saudi Aramco's First Quarter 2024 Results Call. [Operator Instructions] I shall now hand over to Mr. Peter Hutton to begin.

Hello, and welcome to this audio webcast for Saudi Aramco's First Quarter 2024 Results. I'm Peter Hutton, Head of Investor Relations at Aramco, and it gives me great pleasure to be joined today by Ziad Al-Murshed, Executive Vice President and CFO. 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. I'd like to remind you that this webcast and conference call are being recorded and also draw your attention to this cautionary statement. Please also refer to our regulatory filings and website for more details. With that, I will hand over the call to Ziad.

Thank you, Peter, and welcome, everyone. It's always a pleasure to share with you the details of our quarterly performance and our progress in delivering our strategy. I am pleased that the company continues to deliver strong performance. This success is driven by both the quality of our portfolio and the commitment of our employees, to whom I convey sincere thanks and appreciation on behalf of the company's leadership. Now let me begin by walking you through our Q1 performance. Net income was $27.3 billion, with free cash flow of $22.8 billion. Our balance sheet continues to be robust with negative 3.8% gearing at the end of March. This financial strength allowed us to comfortably deliver on our record capital program while also increasing returns to our shareholders. On the operations side, we continued smooth operations, high reliability and are on track on the execution of our growth strategy. This includes making further progress enhancing our Upstream oil and gas capabilities. Meanwhile, in Downstream, we continued to implement our integration plans and expand our international footprint in attractive markets. We also advanced our energy transition strategy with further developments in solar. Our dividend distribution framework is clear and is designed to be resilient on the downside while also sharing the upside and is underpinned by a strong track record of delivery. In 2024, we expect to distribute a significant $124.3 billion in total dividends, which, as you know, is a combination of base dividends and performance-linked dividends. This is an increase of $26.5 billion from our record 2023 distributions, which were already a considerable year-on-year uplift of 27% over what was already record distributions. Dividend payments are, of course, announced quarterly and subject to Board's approval. In the first quarter, we paid dividends of $31.1 billion. This includes the base dividend of $20.3 billion, which was 4% higher than the previous quarter, and the third payment of performance-linked dividends of our combined 2022 and 2023 results, being $10.8 billion, which was an increase by 9% over each of the previous 2 quarters. For Q1, the Board again declared another $20.3 billion of base dividends and $10.8 billion of performance-linked dividends payable in May, a significant year-on-year increase of nearly 60%. We remain confident in our forecasts for mid- and long-term demand growth. Demand in the first quarter was up 2% year-on-year and is at an all-time high. Inventories are at 5-year lows despite increases in supply. I will now turn to our progress in delivering our strategy, starting with Upstream. We are on track with our Berri, Marjan and Zuluf crude oil projects coming online as planned in 2025 and 2026. These projects are among the world leaders in terms of scale and cost. In gas, we made further progress on delivering on our production growth target and have recently increased this growth target to more than 60% by 2030 over 2021 levels. Specifically, this progress is in 2 main areas. First, in Q1, we announced an increase in the proven raw gas reserves of Jafurah by more than 15 trillion cubic feet and over 2 billion barrels of associated liquids. And second, we awarded engineering, procurement and construction contracts for our Fadhili Gas Plant expansion, which will increase capacity by 1.5 billion standard cubic feet per day, taking the plant's total processing capacity to 4 billion standard cubic feet per day by 2027. We also just completed the acquisition of a minority stake in MidOcean Energy, which will give us exposure to select LNG projects globally. In Downstream, we continued to focus on creating offtake security and conversion of liquids into chemicals, which also allows us to capture incremental value further down the hydrocarbon value chain. In Q1, 51% of our crude oil production was utilized by our Downstream system, up by 6 percentage points year-on-year and an increase of 4 percentage points from 2023 levels. Construction commenced at the SABIC Fujian Petrochemical complex in China, with an expected ethylene capacity of up to 1.8 million tons per annum expected to come on stream in 2027. And in further support of our high-value liquids to chemical strategy in China, we also signed an MOU 2 weeks ago for the potential acquisition of 10% stake in Hengli Petrochemical, which owns and operates a 400,000-barrel-per-day refinery and integrated chemicals complex. We also completed the acquisition of a 100% equity stake in Chilean fuels and lubricants retailer, Esmax, which secures a short position in fuels for our long position in Motiva in North America. This expansion into the high-growth South American market will also create valuable opportunities for our Valvoline lubricants business. In our new energies business, momentum continues with the Sudair Solar PV Plant reaching full operating capacity of 1.5 gigawatts. Overall, we are pleased with the progress we are making on our strategy execution. Let me now turn to our key Q1 operational and financial highlights. Upstream EBIT was solid at $54.8 billion in Q1, with production volumes lower by 3.1%, partially offset by a 2.5% increase in realized oil prices. Downstream EBIT was down at $1.2 billion, mainly as a result of refining margins decreasing year-on-year, although still healthy, and chemicals margins remaining low, albeit stable. Our capital investments totaled $11.7 billion, of which organic CapEx was $10.8 billion, which is an increase by 24% year-on-year. Our full year capital investment guidance remains unchanged at $48 billion to $58 billion. Free cash flow was $22.8 billion. And the balance sheet remains strong with gearing of negative 3.8% at the end of March. ROACE was 21.7% over the rolling 4 quarters of Q1 2024. When comparing to the previous year, it is important to note that the higher ROACE in Q1 of 2023 benefited from higher prices and volumes from 3 quarters of 2022. It is also important to highlight that this ROACE reflects an impact from our significant capital investment program, with assets under construction increasing capital employed that is not yet operational to generate returns. Zooming in on dividends, Aramco offers industry-leading distributions backed by our robust earnings and balance sheet strength. Our distribution framework is clear and provides comfort on the downside through a base dividend that we have demonstrated to be sustainable and progressive and shares the upside through a performance-linked dividend. With that, in 2023, we increased distributions by 30% or $22.8 billion to a total payout of $97.8 billion. This year, subject to the Board's approval, of course, we intend to declare a further increase of 27%, which is an additional $26.5 billion of distributions, bringing the total anticipated payout to $124.3 billion in 2024. So this is what we mean when we talk about our ability to deliver attractive growth for our shareholders in our major capital program and high returns to shareholders through our dividend structure. Now before we move to Q&A, I want to leave you with one final point. With the world's rising need for affordable, reliable and more sustainable energy, we remain very confident in our ability to continue to create shareholder value. We continue to use our sustainable competitive advantages and our strong financial position to execute significant growth attractive for our shareholders. We believe Aramco provides a unique proposition given our capacity to deliver both growth and value. With that, Peter and I are pleased to take your questions.

[Operator Instructions] I shall now hand back over to Mr. Hutton for the Q&A session.

Thank you, Charlie. And the first question comes from Mazen Al-Sudairi at Al Rajhi Capital.

Congratulations, Mr. Ziad, for the results. About -- I have a question -- 2 questions. The first question is about the Upstream. Regarding the proven reserve of gas about 15 trillion, how long it will take till it is commercialized? How many years or period it will take? The second question, if you could shed light about the expansion with the SABIC Fuji (sic) [ Fujian ] Petrochemical Complex, when it might -- can it start? About the acquisition, 10% stake in Hengli Petrochemical, if you could shed some light about it.

Mazen, on the Upstream increase in reserves for Jafurah, the 15 trillion cubic feet, that also comes, by the way, a reminder, with 2 billion stock tank barrels of condensate. That's part of Jafurah unconventional. So the monetization of that will be through the production, which we've shown you, which we've communicated earlier on Jafurah. On SABIC Fujian, this is expected to be on stream by 2027. And this is through SABIC, of course. And on your last question, you were referring to 10% in which investment exactly?

Was mentioned about Hengli, about the stake 10% in LNG, yes.

Okay. Yes, this is a continuation of our strategy in China, where we're taking relatively low or minority stakes in highly integrated refining and petrochemical complexes in order to not only place our crude oil but convert a high conversion rate of that into -- of the liquids into chemicals. Hengli itself is a 400 MBD -- 400,000 barrels refinery, highly integrated with world-scale petrochemical facilities in China. The exact close of the deal is still -- and other details are still under negotiation, but it has a conversion rate well over 50%. This is similar to the other investments that you've seen us execute and close in China.

Thank you, Mazen. And the next question comes from Michele Della Vigna of Goldman Sachs.

Congratulations on another very strong quarter. Two questions, if I may. The first one refers to the Jafurah field that is -- the gift that keeps on giving in terms of reserves. I was wondering if perhaps you could shed a little bit of light on what you think are the economics of the field in terms especially of cost per MCF. And secondly, we're -- when you think that Saudi could be in a position where not only satisfies all of the domestic growth but also perhaps is ready to export some of these volumes and thinking about your recent entry into LNG, how that can create a global value chain for you in addition to the existing businesses? Secondly, you're clearly demonstrating very strong capital discipline, the choice to delay the Safaniya development. We've also seen news of Marjan and Zuluf perhaps being slowed down. I was wondering if you could make any comment on that.

Michele, sorry, could you repeat the last question?

Of course, of course. We've seen some news that perhaps Marjan and Zuluf field also may be developed a little bit more slowly than initially planned after the decision of delaying Safaniya in the context of the strong capital discipline. And I was wondering if you had any comments on that.

Michele, thank you for the questions. On the Jafurah field economics, we do not disclose specifically dollar per MCF economics. But what I can tell you is it is advantaged versus Henry Hub. On exports optionality, as we've said before, we're prioritizing -- to the extent that domestic demand is met and there are volumes available for export, we are prioritizing blue hydrogen, blue ammonia over that. But then again, that depends on offtake availability, which we continue to work on. So that's always an option. That's our first priority. And of course, if that doesn't happen, then to the extent that there are volumes available for export, then LNG is an option. And on your third question, Marjan and Zuluf developments are going per plan. We are not slowing down field development, and everything is progressing very well and per plan.

Thanks, Michele. And the next question is from Martijn Rats at Morgan Stanley.

I've got 2 as well, if I may. I wanted to ask you about jack-ups. On the last call, there was a comment about reduced need for oil-directed jack-ups but offset by growth in jack-up requirement for natural -- for gas. Keeping sort of the overall jack-up demand sort of broadly stable, I was wondering if that comment is still sort of valid today. And then secondly, I was intrigued by your comment about a large amount of unproductive capital weighing on the return on capital calculation. I was wondering if you could sort of give an order of magnitude of how big the impact is or perhaps the total sum of unproductive capital in the company at the moment.