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

Welcome to the Saudi Aramco's Half Year 2025 Results Call. We will be holding a question-and-answer session following the presentation. [Operator Instructions] I shall now hand you over to Mr. Peter Hutton to begin.

Hello, and welcome to this audio broadcast discussing Saudi Aramco's First half 2025 Results. I'm Peter Hutton, Head of Investor Relations at Aramco. I'm delighted to be joined by Amin Nasser, President and CEO; and Ziad Al-Murshed, Executive Vice President and CFO. Our broadcast today will include a short presentation and question-and-answer session, and we expect the call to last up to an hour. Please refer to this cautionary statement on forward-looking information, our regulatory filings and our website for more details. With that, I'll now hand the call over to Amin.

Thank you, Peter, and welcome, everyone, and thank you for joining us on our earnings call today. In the past few months, we have witnessed a lot of volatility in oil markets. And it is during such times that our resilience, competitive advantage and the ability to capture opportunities turned out. More recently, we are seeing ongoing strength in oil demand. Aramco has continued to demonstrate its low cost structure and operational discipline, strong financial position and the ability to deliver, which differentiates our position. This allow us to deliver long-term growth and feasibility and our return to shareholders through dividends despite headwinds in the macro environment. Let's now take you through the key drivers behind our performance and progress. Over the first half 2025, our results demonstrated our resilience in times of volatility with adjusted net income of $50.9 billion and free cash flow of $34.4 billion, with gearing of 6.5%, our balance sheet is amongst the healthiest in the sector. Ziad will take you through the second quarter financials in more detail. This gives us the ability to deliver world-class projects to extend and we invest in our portfolio and position us in higher growth markets while continuing to focus on cost discipline and cash flow growth. In terms of supply, we have responded quickly and efficiently to increase production volumes. We achieved 100% reliability for the first half of the year on delivery across both crude and products, all of which makes Aramco a partner of choice. We are active in pursuing growth opportunities while maintaining a significant premium in our returns, as shown by our ROACE of around 19%. We will distribute around $21.1 billion in base dividends for the second quarter, up 4.2% year-on-year plus $220 million for the sales payment of performance-linked dividends for the full year 2024 results. Before turning to our business performance, let me focus on the macro environment. Recently, we have seen the range of demand growth forecast very and widened mainly due to uncertainty from global trade tariffs. Despite that, physical market signals have been strong lately from both steady economic performance in China and the U.S. and a strong performance in the oil market fundamentals supporting demand for our crude and products. Global demand so far this year has been fair with SMB estimates showing an average of 105.3 million barrels per day for January to August, supported by gasoline and jet fuel consumption. Going from this strong demand so far, we also know that oil demand in the second half is historically over 2% higher on average than the first half due to seasonality. So we are looking at the second half to be more than 2 million barrels per day higher than the first half. At the same time, global inventories remained low at 3.6 billion barrels. Indeed, the signals and the physical market are clearer than the range in some analyst forecast, and we expect full year 2025 demand to be at the higher end of the range, just as it was in the first half. We continue to execute our growth plan as we leverage our strength to deliver cash flow growth into the future. In the second quarter, we demonstrated our ability to quickly ramp up production with total hydrocarbon reduction of 12.8 million barrels of oil equivalent per day, up by 475,000 barrels of oil equivalent per day versus the first quarter. We continue to make significant progress across our development of advantaged gas and liquid projects. Jafurah Phase 1 and Tanajib gas plant are on track for completion in the fourth quarter this year. In liquids, Dammam Phase 1 is on stream, while Marjan and Berri are also on track for completion later this year, bringing a further 575,000 barrels per day of production capacity. Our Dammam Phase 1 is yet another good example of how our technical expertise creates additional value. The reservoirs are in an area, which is difficult to access and our precision drilling of a 5-kilometer extended horizontal well helps capture around 850 million barrels of reserves in the Dammam complex, further supporting our low-cost, low depletion and lower upstream carbon intensity operating model. In the first half of this year, 54% of our crude oil production was utilized by our captive downstream system slightly lower than the first quarter as our production base increases. And Downstream, we continue to pursue initiatives that drive incremental operating cash flow. This includes upgrading our portfolio, growing our liquid to chemical business and making performance improvement across the business. In the New Energies, so far this year, we have signed agreement to invest in 5 solar and 2 wind projects in the Kingdom Holding, a 30% equity stake in each. This strong progress brings our cumulative renewable equity capacity that are operational and under development to 7.4 gigawatts to date. This represents more than half of our 12 gigawatt 2030 target having been achieved in just 3 years. Meanwhile, in the area of Blue Hydrogen, we continue to exercise discipline and rigor assessing potential offtake agreements. Aramco's integrated business model remains a key strength as we drive synergies across various business lines, and we are actively progressing this integration to unlock more value. For example, our 100% supply reliability is reinforced by the resilience of our operation, the flexibility of our global assets and our trading capabilities. In addition to the flexibility of our Upstream operation in the Kingdom, we have multiple supply buoyant serving global markets, especially Asia. We also operate significant storage and supply facility in Europe, the Mediterranean, Asia and U.S., at scale and at a low cost. Our trading business has expanded profitability into new geographies and product opportunities and our investment in MidOcean LNG and announced offtake agreement enhance the trading platform. In Chemicals, our investment in liquid to chemical also position us in higher growth areas and enhances our portfolio with 3 key elements: equity-light positions and projects with high conversion rates with high share of feedstock offtake. Meanwhile, we have already achieved $3.5 billion of targeted $3 billion to $4 billion recurring SABIC synergies by the end of 2025 in areas, including procurement, feedstock optimization, stream integration and operations. We are capturing value further down the value chain as 250 Aramco branded retail stations have been launched globally since 2024. The expanding global network in high-growth regions will enable us to further increase our product offering. Finally, we are continuing to progress our new energy strategy, leveraging the Kingdom's advantaged solar and wind resources. In short, the progress we are making across the multiple elements of our portfolio integration will generate higher value and deliver increased cash flows. On that note, I will now hand over to Ziad to provide more details on our second quarter performance.

Thank you, Amin, and welcome, everyone. We continue to deliver a robust financial performance in the second quarter of 2025 despite market volatilities. From this quarter onwards, we have started to report adjusted earnings. We previously shared certain specific items to aid investors' understanding of our underlying performance, and now we are formalizing the process to identify one-off nonoperating and nonrecurring items to further enhance our disclosures and visibility. With that clarification, let me drill down into the financial performance for Q2. Our adjusted net income in Q2 was $24.5 billion, down 7%, mainly due to crude oil prices. Upstream adjusted EBIT was $44.7 billion and Downstream adjusted EBIT was $2.6 billion. Downstream EBIT was up more than double quarter-on-quarter, mainly due to improving refining margins, partially offset by continued weakness in chemicals margins. Our capital investments were $12.4 billion in Q2, taking the total for the first half to $25.5 billion. Our full year capital investment guidance remains unchanged at $52 billion to $58 billion, and we expect to provide a further update with our Q3 results. Free cash flow was $15.2 billion in Q2, and our financial position remains strong with balance sheet gearing at 6.5% at the end of June, which remains peer-leading. Our 12-month rolling ROACE was 18.7%, which is around twice the average of our peers. Zooming in on our distributions, our resilience and ability to continue to deliver value to our shareholders in any macro environment underscores the strategy of our dividend policy. As we have noted before, our progressive and sustainable base dividend offers comfort on the downside, while our performance-linked dividend shares any further upside. This is once again demonstrated by our Q2 base dividend, which is $21.1 billion as declared by the Board and which represents a 4.2% increase year-on-year. In addition, a performance-linked dividend of $220 million has been declared, aligned with our previously communicated mechanism. Both of these dividends will be distributed to shareholders later this month. In conclusion, before we take your questions, I will recap our investment proposition. With our industry-leading competitive advantages and unrivaled financial strength, we are focused on maximizing returns and growing operating cash flow, further underpinning our world-class distributions. This is why we believe we offer a very attractive investment proposition. With that, thank you for your attention. Amin, Peter and I are pleased to now take your questions.

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

Thank you very much. And our first question is from Iyad Ghulam at SNB Capital.

I have 2 questions. One is about the impact of tariffs on Aramco's business. And the second is about the increasing production as announced by OPEC+. Will that increase your CapEx and overall OpEx?

[Technical Difficulty] can you hear us.

Yes.

You didn't hear us from the beginning. Okay. Sorry about that. As I said, I repeat what I said, with regard to tariff, it has an impact -- some sort of an impact on the global economy. However, as you've seen in the tariffs in terms of hydrocarbon, it's exempted in terms of -- from these tariffs in a lot of -- when it was applied to different countries. But if you look at China, for example, and even with the tariffs implication on China, China demand continued to be at 17.5 million barrels with a growth of about 200,000 barrels this year. So the market is healthy in terms of demand for production. And for that, it has a limited impact on demand, and we will continue to see growth. What we have seen this year significant growth. We're reaching based on SMB 105.8 million barrels for the full year of 2025. And we expect the second half a growth additional of around 2%. So if you think about, we are looking at more than 100 million barrels. So that's more than 2 million barrels of additional demand. And with regard to your questions, since from April through September, we, as Aramco seen close approximately 1 million barrels of additional production. That is part of our spare capacity with some with no or minimal additional cost for Saudi Aramco. And just to add maybe one item is that if you want to use a rule of thumb, each 0.1 million barrels of increase in production is expected to generate an annual additional cash flow of about $1.1 billion at $70 per barrel. Just to add an additional information.

Thank you. Apologies for the unusual technical delay there, but back with you now. And the next question comes from Biraj Borkhataria of RBC.

I had 2, please. The first one is just on your ambitions in the LNG space. You've obviously increased your stake in MidOcean recently. Could you just give a sense of your ambitions in that space over the next 5 to 10 years? Do you want to be a top portfolio player? I noticed one of your peers in the GCC has made some very significant moves in the last few months. It suggests the market for assets remains very competitive there. And then the second question is just on the -- your efforts in hydrogen. I noticed you referenced it on your slides. I haven't seen much in that space. And I think one of your peers in the U.S. is also facing similar challenges and struggling to find buyers who will sign an offtake. So could we get a quick status update there? Have you had any more fruitful discussions or any commitments from buyers on that front?

Thank you, Biraj. With regard to LNG, yes, we had an agreement and we signed with MidOcean and -- we are looking at -- we also signed some agreements with next decade for about 1.2 million tonnes. And we are in discussion on certain also agreements that we are currently evaluating that will give us close to 2 million tonnes. So we are in the space right now, not fully completed. We're looking at something in the range of about 4.5 million tonnes. Some of it offtake, some of its equity. Our long-term ambition is to have 20 million tonnes of LNG capacity. And we continue to evaluate a lot of opportunities currently in our pipeline. With regard to hydrogen, we are still looking -- in discussion with some customers in Korea and Japan. We know our feedstock, our position when it comes to advantaged position in carbon capture and storage in the Kingdom to produce blue ammonia. We are very competitive. We know that from the numbers and the bids that is happening. However, until we sign an offtake agreement, we will not proceed with construction. When we sign the offtake agreement, we are ready to start constructing the facilities. Everything from an engineering point of view is available and ready. It is just signing the offtake agreement and the discussions still continue until that materialize, we will not proceed with construction.

And the next question comes from Michele Della Vigna of Goldman Sachs.

Congratulations on the strong results, but also on being the only oil company that called correctly the strength in oil demand that we're seeing at the moment. Two questions, if I may. The first one, I wanted to come back to your comment on the Jafurah start-up. And I was wondering when you think that it could lead to an end of crude burning in Saudi Arabia for power generation in the summer? And then secondly, in downstream, we're seeing an exceptionally strong refining environment, but also at the same time, a bit of weakness in chemicals. I was just wondering if that changes in any way your longer-term growth strategies in Downstream.

Thank you, Michele. With regard to Jafurah, it's on track for the end of this year for Phase 1 and for the full potential of Jafurah at 2 billion scf per day by 2030. And the interest in Jafurah is not because of gas only, it's because of the liquid, as we said before, 630,000 barrels of gas liquids and approximately 430 million scf of ethane that will come with this 2 billion of gas. Growth in gas will continue. We still -- our production by 2030 compared to our 2021 production will grow by more than 60% and the whole purpose and it is on track to eliminate liquid burning in the Kingdom which was approximately close to approximately 1 million barrels. And between the additional gas and the renewable projects that are currently on, we are expected to eliminate that liquid burning by 2030. And the plan is still ongoing. No changes to our plan with regard to construction. Ziad will answer the part about the downstream refining and chemical margins.

Yes. Michele, on downstream, you're correct, we're seeing improvements in refining margins, while chemical margins remain weak. However, as you very well know, these are cyclical businesses including chemicals. So we expect longer term -- or mid- to long term, the chemical margins to also improve as demand increases to catch up to what has been overinvestment in chemicals capacity. Our long-term strategy remains the same. We're looking at integration of refining and chemicals and integrating refining and chemicals with our upstream position. So our objective, as you know, is to convert liquids into chemicals, and we still have our target of placing up to 4 million barrels of liquids into petrochemical producing complexes at high conversion rates. So far, this goal of maximizing liquids to chemicals throughput, we've achieved approximately 45% of our long-term target through our onstream projects, and we expect to see further process in the coming 3 years through the start-up of 4 major projects. We have S-Oil expansion in Korea, which we call Project Shaheen. We have Huajin Aramco Petrochemicals in China. We have the Amiral project in SATORP in Jubail of Saudi Arabia. And we have a project in Fujian, which SABIC is doing in Fujian in China. To us, this strategy of liquids-to-chemicals is a natural hedge and provides not only growth, but a hedge for our upstream position. The focus, of course, remains on priority markets. So China, elsewhere in Asia and in the rest of the world, we're being opportunistic.

And the next question comes from Sashank Lanka of Bank of America.

I think most of my questions have been answered, but I just have one question on your downstream expansion. I think last year, you did announce quite a flurry of deals. But this year, we haven't really seen any new announcement on the downstream side, especially in China. So just wondering if this is more of you trying to integrate what you've done so far and complete those transactions before you go ahead with more transactions. Yes, would like some clarity around framework of your downstream expansions.

Yes. Thank you, Sashank. We still have a good number of deals in the pipeline. And until we close these deals, we cannot announce them. But we still are reviewing some of the deals in China and elsewhere with regard to investment depending on the opportunities that exist. But we do have a number of deals and announcement will come when we close these deals.

And the next question is from Kim Fustier of HSBC.

I had 2, please. The first one is on your crude oil production. The OPEC monthly oil market report for July showed that the Aramco's production surged in June to more than 9.7 million barrels a day, but supply to market was lower than that. I just wondered what you included in your 2Q production figures? Was it supply to market or actual production? And sort of related to that, any color you can share about your domestic oil inventories would be quite useful as well. My second question is on Jafurah on the Phase 1. I seem to remember that guidance from a year ago was for a 3Q start-up, and now you're talking about 4Q. So I just wondered if there had been a small delay there.

Jafurah, I'll answer the second question with regard to Jafurah. We're still looking at the fourth quarter to start up Jafurah, and it's progressing very well. And to me, it just continue to be on track for delivery to the market and activities there is very strong. We don't comment on our production, but you need to take into consideration this. We go by targets that we receive and very always stick to these targets that we received from the Ministry of Energy with regard to our production that we receive every month. As I highlighted earlier, from April through September, the expected approximately growth in our production is close to 1 million barrels. This comes with no or minimal additional cost to Saudi Aramco as we have spare capacity and our maximum system capacity today is 12 million barrels. So that gives us a huge opportunity for growth in the future.

And the next question is from Henri Patricot of UBS.

Two questions from me, please. The first one on the CapEx guidance for 2025, which you didn't change today. But in the first half, you're tracking below that guidance range, that CapEx tends to be higher in the second half of the year, but would it be fair to expect CapEx to end up towards the lower end of the range in '25? And then secondly, I wanted to ask about AI. I think -- I mean, you made some comments recently about $4 billion of savings so far, thanks to AI. I was wondering if you can elaborate on where the bulk of these savings have been coming from? And how much more you think there is to come from applying AI more broadly in your business?

Thank you, Henri. We continue to maintain the same guidance from $52 billion to $56 billion. I understand the first half is around $50 billion. However, we will update -- and on the third quarter, it is a question of timing when you look at the $50 billion for the first half and calendarization. But the guidance, we give a more narrow guidance on the third quarter with regard to the full year. With regard to AI, we are heavily investing on digitalization and AI, and we have developed Aramco large language model, which is a cutting-edge generative AI model to unleash the potential of AI application and order also to optimize the company financial performance and fortify climate leadership and enhance safety and productivity. This is also capitalizing on our venture capital program, which was expanded by $4 billion to reach a total of $7.5 billion, focusing on investing in new technologies. Now when I talk about total realized value as a result of capitalizing almost -- in 2024, we achieved $4 billion. Almost half of that is a result of AI. In 2025, we are looking at $2 billion to $4 billion in total realized value and areas where we have really benefited big times, you can look at productivity in terms of geosteering, in terms of exploration, seismic interpretation, everything related to our business, preventive maintenance of our plants and increasing the efficiency of our plants, reducing carbon emission by better monitoring. AI is mixed in everything that we are doing in Saudi Aramco, and we are seeing the full benefits of that. We see it in the productivity of wells that we are able to increase the productivity in certain area by 2x and sometimes 3x capitalizing on AI technology. So the benefit will only increase as we build on our capability. And we are benefiting not only by our infrastructure that we have done over the years because you need for AI to materialize, you need the data quality, which means that is harnessed over the years. And we have data from inceptions that are kept for good use, and we are using it big time right now. We have strong infrastructure and computing capability and digitalization, inferencing and all of these things. And we have the talents. I mean, other than the data scientists, a couple of hundred data scientists that we have, we benefited a lot from our subject matter experts that are trained on AI that are identifying opportunities. So far, we carry close to 500 use cases. Each use case is a project in itself. It has a time line, savings and delivery expectation. And we're monitoring all of these use cases and each have a group of subject matter with data scientists behind it to deliver on these things. So we are seeing the full benefit of AI. And when people talk about AI and the cost for building the data center and the energy requirement, I always say the benefits far exceed the cost associated with all of these AI infrastructure that we're building over the foreseeable future.