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

Welcome to the Saudi Aramco's Third Quarter 2025 Results Call. We will 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 broadcast discussing Saudi Aramco's Third Quarter 2025 results. I'm Peter Hutton, Head of Investor Relations at Aramco, and I'm pleased to be joined today 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 the cautionary statement on forward-looking information or regulatory filings and our website for more details. With that, I will now hand over the call to Amin.

Thank you, Peter, and welcome, everyone, and thank you for joining us. Today, we have announced very strong results for the third quarter, and we are also significantly increasing our guidance for longer-term growth. This includes raising our sales gas production capacity growth target by 2030 to around 80% from 60% over 2021 production levels, increasing the incremental operating cash flow outlook from our gas program to $12 billion to $15 billion in 2030 from 2024 levels, which is around $3 billion to $5 billion growth from previous guidance. Building on our clear advantages and scale in technology and digitalization to take a next level position in Gen AI while meeting the higher energy demand from data centers with our higher gas supply availability and maintaining our strong focus on reliability and financial trends which continues to differentiate Aramco and position us for longer-term success. In the third quarter, Aramco delivered strong momentum in operating results and financial performance. Our adjusted net income of $28 billion rose 14% from the previous quarter and was up year-on-year, driven largely by the increase in crude production. Total liquids production at the end of the third quarter was around 1 million barrels per day higher than the start of the second quarter. A reminder of the scale and flexibility of our assets and the upside to earnings. Our free cash flow of $23.6 billion in the third quarter is up 55% quarter-on-quarter and 7% year-on-year. In our gas business, there is strong momentum in both demand and supply which has led us to revise up our sales gas production capacity growth target to around 80% by 2030. This is the second upward revision on our gas growth target originally from 50% growth compared with 2021 levels to over 60% and now around 80%. With this, we now expect the higher gas growth to generate $12 billion to $15 billion in incremental operating cash flow in 2030, a significant increase from our previous target. Our results demonstrate our strategic approach to value-focused investment and cash flow maximization. We are delivering on our advantaged growth programs, which will drive long-term value creation for our shareholders. Aramco today is a larger gas producer than any of the major IOCs serving a market which is the sixth largest in the world and a captive market for Aramco, which is growing rapidly. That growth had underpinned our earlier guidance to increase 2030 sales gas production capacity by more than 60%. As we develop our plans, we see demand growth increasing more than previously forecasted, including higher demand from additional users such as AI data centers. We are also delivering material improvement and efficiencies and operating potential across the gas portfolio from reserve delineation enhanced drilling techniques and the application of new technologies. The combination of these factors together drive the increase in our new guidance to grow production capacity by around 80% by 2030, up from 60% from the same plans and projects. That's about a 33% increase in gas growth, which we expect to be especially attractive for investors. But this increase in gas and production of more high-value associated liquids, we expect the scale of our gas program by 2030 will be around 6 million barrels of oil equivalent per day. This will be larger than any IOCs total hydrocarbon production in 2024, let alone gas. Aramco has been at the forefront of world-class technology in the energy sector for decades. Our unique scale, exclusive operating position and financial strength enable us to deploy technology at a level unmatched by any other energy company. We are utilizing digitalization and now AI more extensively. We process of our $10 billion data points daily drawn from 90 years of exclusive operational data generating insight and decision-making capabilities. Our investment in technology and computing power such as Dammam-7, one of the most powerful supercomputers in the world and in the industry's first industrial large language AI model are driving innovation and improvement through deep learning and continuous evolution. AI is already a critical driver in our focus and commitment to technology and R&D and is generating tangible returns. 2023 and 2024 and we achieved a combined $6 billion of technology realized value, which has been independently verified. And around half of that $4 billion realized in 2024 was driven by AI solutions. Our recent announcement to invest in HUMAIN represent a transformational shift that build on our significant advantages accelerate value creation for Aramco to build our competitive advantages through AI. This planned investment combines the AI program and initiative for both Aramco and Saudi Arabia's Public Investment Fund into HUMAIN. It will drive HUMAIN's operations and growth as a regional leading AI infrastructure, cloud services and AI applications provider. Through HUMAIN exclusive right in the Kingdom, we can develop impactful and scalable AI capabilities and also benefit from revenue growth potential. The AI tech transformation offers an attractive value proposition with increasing energy demand from AI power data center. We are well positioned to capture these opportunities with our increased gas supply capacity investment and renewable energy sources, along with one of the lowest hydrocarbon costs and upstream carbon and methane intensities. The combination of scale technology and efficiency gives Aramco a structural advantage as the energy system becomes increasingly digital, reinforcing our position as a global leader and energy technology. Before handing over the call to Ziad, let me provide some insight on the macro environment. Despite concerns about the embed of global tariffs, the world economy remains healthy, with estimates for world GDB growth now at 2.8%, up from 2.6%. And as seen on the top right chart of this slide, consensus estimate indicate 2 million barrels per day of growth from the first half to the second half of this year, which is a substantial upward revision of 500,000 barrels per day from previous consensus forecast. For full year 2025, we expect record oil demand of at least 106 million barrels per day, with market fundamentals remaining strong. Inventories are stable and below the 5-year average despite OPEC+ unwinding. Refining margins have doubled in certain regions with refineries operating at maximum capacity at end, which may continue into next year. Given these signals, we recognize the need for continued oil investment to meet rising demand. As you can see in the bottom right chart, the volume of resources that reached FID over the past decade have tagged behind production failing to replace 100% of barrels produced -- and in fact, resources achieving FID as a proportion of annual depletion is estimated to reach a low of 32% this year. Supply in recent year is supported by resources that reached FID during the high investment period of 2008, 2014. As demand continues to rise in the years ahead, there is a greater need for investment. At Aramco, we are well positioned to capture the potential upside and maximize shareholder value. And let me now hand over to Ziad to discuss our Q3 operational and financial performance.

Thank you, Amin, and welcome, everyone. In the third quarter, we continued to deliver on our industry-leading growth programs with a very strong set of results. We are delivering strong operational momentum in our businesses, with several major liquids and gas projects coming online soon. These include Marjan and Berri projects, which are on track for completion by year-end, and will add a combined 550,000 barrels per day of crude oil production capacity. Our gas expansion projects, including Jafurah Phase I the vast unconventional mega project and a crown jewel of our portfolio and Tanajib gas plants are also on track for completion by year-end. Together, these add 1.3 billion standard cubic feet per day of combined sales gas production capacity. In the third quarter, we secured $11.1 billion of proceeds through the Jafurah midstream transaction with an international consortium. In Downstream, we continued to capture value through integration. 54% of our crude oil production was utilized by our own downstream system in the first 3 quarters of 2025. We are strengthening our operational excellence with strong operational availability and our supply reliability remained high at 99.9% as of Q3. Our strong performance has demonstrated the resilience of Aramco's integrated portfolio underscoring the effectiveness of our strategy, while capturing value across the hydrocarbon value chain. Zooming into our financial performance. As Amin outlined, our strong results in Q3 captured the impact of increased crude oil volumes, but also a strong performance throughout our business. Our gas production in Q3 was the highest ever since our IPO and downstream adjusted EBIT was the strongest since Q1 of 2024, when we started to provide the data. Upstream adjusted EBIT was $51.5 billion, up 15% from Q2. And Downstream adjusted EBIT was resilient quarter-on-quarter at $2.6 billion. Our group adjusted net income was $28 billion, up 14% from Q2 and also up year-on-year. Capital investments were $12.9 billion in Q3, taking the total to $38.4 billion in the first 3 quarters of this year. We continue to deliver our investment program on track and in guidance. We previously announced we expected 2025 range of $52 billion to $58 billion Today, we are narrowing this guidance to the lower half of that range from $52 billion to $55 billion. Free cash flow this quarter has increased by 55% to $23.6 billion compared to last quarter, driven by strong operating activities and financial discipline. Our financial position remains strong with balance sheet gearing of 6.3% at the end of September, slightly down on Q2 and remains industry-leading. Our 12-month rolling ROACE was 18.4%, which is around twice the average of our peers despite an impact from our significant capital investment program with assets under construction of around $110 billion increase in capital employed is not yet operational to generate attractive returns. Our resilience and ability to generate strong cash flows in any macro environment underscores the visibility of shareholder distributions. We expect significant upside in our operating cash flows based on projected demand. Our revised gas program growth target of around 80% is now expected to generate a further $12 billion to $15 billion of operating cash flow and our downstream business is expected to generate an incremental $8 billion to $10 billion of operating cash flow from further growth and performance improvements in 2030. And as we have demonstrated, we are able to increase crude oil volumes quickly, efficiently and with little incremental cost. Our rule of thumb is that every 1 million barrels per day of additional crude oil production translates into an additional $11 billion of annual operating cash flow based on 2025 average prices year-to-date. For illustration, if we were to use half of our available capacity in 2030. The additional $16.5 billion compared to 2024, plus the $20 billion to $25 billion from gas and downstream, would equate to around $40 billion additional operating cash flow. That would be around 30% higher in annualized operating cash flows in 2030 versus 2024, providing further upside potential to future distributions. The visibility of our dividend framework is underpinned by a progressive and sustainable base dividend offering resilience on the downside with our performance-linked dividend sharing any further upside. We've built a clear and consistent track record of our quarterly base dividend, which we grew over the past 3 years by about 13% to reach $21.1 billion this quarter as declared by the Board. 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 summary, we are able to deliver very attractive dividend growth and visibility even as we are reinvesting significantly in our business to sustain advantage, capture opportunities and build a stronger platform for further cash flow growth well into the future. Before we take your questions, let me recap our growth trajectory and investment proposition. We saw strong results in the quarter, thanks to increased liquid and gas production, helping increase cash flows. We are well positioned to grow operating cash flows even more in the future. We will continue to lead in technology and our further investments in AI are expected to support more value creation through digital transformation. We believe this continues to make Aramco a very attractive investment proposition. With that, thank you for your attention. Amin, Peter and I are pleased to take your questions.

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

Thank you very much. And our first question comes Iyad Ghulam from SNB.

Congratulations on the strong results. I have 2 questions. The first one is regarding the additional gas capacity. What was the main enabler for that increase from 60% to 80%? And will that increase lead to higher CapEx? That's my first question. The second question is about the decline in OpEx, which supported the results in Q3. Can you please just some light on the drivers behind the lower OpEx? And is that driven by efficiency? Or is that sustainable in the long term?

Thank you. I'll take the first question, and Ziad will answer the second one. With regard to the additional gas, as you remember, we have been saying before that it will increase by 50% compared to our 2021 production level and then we increased investment now we increased it to 80% is a result of our continued operational improvement in our operation, capitalizing on a lot of technologies that we are capturing to higher productivity from existing world. Don't forget these are -- as we sell more in the field and we put more slot in the different fields, we gain more information and capitalizing on our ability through the technology and efficiency improvement and sales, we are able to increase capacity capturing more production from even existing banks that had flexibility for added additional production on gas. So it is efficiency improvement. It is technology higher productivity from the existing worlds, which helped us to do with minimal, we mentioned -- we highlighted it is a minimal capital or to increase -- to achieve that increase in that increased from 60% to 80%. So there is no higher capital that would be required to achieve that growth that we are planning for. Ziad?

Yes. On your second question, the lower operating costs are mainly due to lower royalty associated with the lower oil price versus last year as well as the lower value purpose.

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

And really, congratulations on the strong delivery target upgrade and the focus on capital efficiency. I wanted to come back to your comment on the AI-driven value generation because it's clearly a very important topic. And I was wondering if you could lay out how you see that increasing the productivity, especially of your upstream? And given that you continue to increase production. I was just wondering how you're thinking about on one side, all of this productivity improvement and on the other side, perhaps the need to start increasing some of your rig count in the country and longer term, maybe restart the Safaniya tender process, which was stopped back in 2022, but which at some point could become another important assets to continue to support your sector-leading growth?

Thank you, Michele. Aramco has been at the forefront of developing technology since the beginning. We are different than other companies as we are able to quantify and recognize it dollar value. We have mentioned before that in 2023 and 2024, the total realized value from technology is $6 million. Almost 50% of that is related to AI. Our target going forward, for example, '25 and beyond is $2 billion to $4 billion of technology realized value. So it is something that we are expecting to benefit from. But for AI to benefit from the full scale of AI and technology and digitalization, I always say you need to have their computing infrastructure. For example, if you look at Aramco, there are 2 multiple, what we call, high-performance computer. There is 2 supercomputers that exist. We had -- we built the infrastructure connectivity via satellite or transmitters or fiber optics between the field and the central areas for better control over many, many years, not to mention you need the quality of data, and this is something that we are good at. We have more than 90 years of historical geological data. And we -- every day, we receive 10 billion daily data points to receive that match of data points and benefit out of that in terms of your analytical and evaluation, you need to have the infrastructure. One thing that is also more important to realize the value, you need to have the talent is a most important thing. It's not only the data scientist, the 200 or 300 data scientist exists in the company. It is the subject matter professionals that are in the different plants, and we have 6,000 today in Aramco trained on AI. That's why the number of use cases in Aramco is increasing over the year. We have now more than 400 use case. Each use case is a project because it has that impact yield in a column in a plant or its impact productivity from an existing plan. And -- or you look at individual worlds, we can maximize the productivity from existing worlds, capitalizing on AI technology by putting our lateral in more productive zone. This needs a lot of analytical and data and your share of ours and simulation capability that is not matched anywhere in the world in terms of the capability that we have to all of that simulation runs, simultaneously while we're drilling these worlds. So we have benefited over time. And we are one of the few companies that we look at the realized value every year, and we use a third party to ensure that, that realized value is captured in our books. So it's something that I think -- we believe in AI and digitalization and the benefit of it. But as I said, without the infrastructure, it's not about bringing GBUs and ships and putting them in a data center, and you think you can achieve the same. It is about the connectivity about building that infrastructure. And we have put a lot of investment over the years to ensure that we have what we have today in terms of utilization. And that helps us -- and our -- what you've seen today in our gas growth from 60% to 80%, capturing all of that. With regard to your comments regarding Safaniya that we put it. Remember in a project that we were looked at before were based on us going to 13 million barrels. Now the capacity and MSC, the maximum sustained capacity for Aramco is 12. So anything that is required to maintain the capacity is still ongoing. Berri is still on. Marjan is on, sort of, heavy is on and other infill drilling required is still on. So we have a very strong maintain potential program to ensure that our maximum seen capacity is available when needed in the market. But we are not really -- and when there is a need to bring additional increments in the future to maintain that capacity or if the government asked to increase that capacity beyond the first [ billion ]. We are -- increments are readily available to -- and our reserve base of more than [ 250 billion ] barrels is readily available to increase our capacity if required.

Thank you, Michele. And the next question is from Sashank Lanka of Bank of America.

Congratulations on a solid set of results. I have 2 questions from my side. Just in terms of the incremental gas sales target that you're mentioning, I was just wondering if, again, it's going to be mainly focused on the domestic market. The reason I ask that is we, in the past, understood that 1 million barrels per day of oil will be replaced by about 5 billion cubic feet per day of gas for power generation. So just wondering this incremental production, is that all still going to go to domestic markets? Or is there some other use as well? That's the first question. And the second question is with regards to the midstream deal, Jafurah that you did the proceeds of $11.1 billion. which quarter are you going to realize that in your cash flows? And how should we be looking at those proceeds in the context of your dividend -- cash available for dividend payments?

Thank you, Sashank. With regard to the gas, we are generating measure return through captive domestic demand, including the growth from AI data centers in the Kingdom. And definitely, the market in Saudi Arabia, even with the build of renewables, still there is need for more gas, either our industry, utility and now what's coming through its data centers and requirements in the future for data centers and that would require energy. Any additional beyond this gas beyond satisfying the Kingdom requirement, it can be utilized for low carbon hydrogen profile that there is an offtake or we will continue to evaluate LNG as an option. If there is excess demand or supply beyond the Kingdom requirement for that. With regard to midstream Jafurah, I think Ziad will talk about that. I think It's in the fourth quarter, but Ziad can shed more light.

So Sashank, we've already received the proceeds that will be reflected like Amin said in Q4, the use of it, just a reminder that this is part of our portfolio optimization program. And so the use of this is mainly to be redeployed according to our cash priorities. Our cash prides have not changed. So I mean it's cash, cash is fungible. So if you're tying it to dividends, it's again, the priorities are sustating CapEx followed by the base dividend, followed by growth and then followed by additional distributions for further deleveraging. So -- this is our -- we're delivering on what we said in the portfolio optimization program that we've unlocked this capital.

Thanks, Sashank. The next question is from Kim Fustier of HSBC.

I noticed the strength in operating cash flow this quarter, which drove I believe, dispersed reduction in your gearing ratio since mid-2023. So the growth in cash flow was twice of adjusted net income compared to the second quarter. Could you talk about the moving parts? Anything in particular that boosted cash conversion this quarter? And then my second question is just going back to gas. Jafurah, I believe only part of your gas expansion program towards the 80% growth target, could you talk about the other contributions from conventional fields, gas separation, et cetera?

Thank you, Kim. Ziad will answer the first question, and I will -- with regard to your second question about whether Jafurah is still the same. We are talking about the $2 billion by 2030. We start first is this quarter. But you are right, it is coming from the different increments that we have in the field, different plans that we have, Haradh and Hawiyah at our plan and incremental capacity that we have in [indiscernible] the energy gas plants that we are putting on this year, which is one of the biggest plant at $2.6 billion. And of course, as I say, there is a Hawiyah expansion -- public expansion and then additional, as you said, capacity even in existing [indiscernible] that have capacity, they have more flexibility by adding more production to [ 80% ]. Ziad?

Kim, on your second question on operating cash flow, we did indeed see an increase in free cash flow quarter-on-quarter of 5%. The -- some of the moving parts. You've seen us do -- of course, the earnings are higher. So that's the major driver. And we had a favorable movement in working capital. And then lastly, you've seen us limit or narrow the capital guidance range to the lower end. And so the run rate during the third quarter was lower. So those are the main 3 moving parts.

And the next question is from Henri Patricot of UBS.

Two questions, please, on the past target. The first one, on the associated cash flow growth, which has gone to 15 -- 15, sorry, from 9 to 10. So wider range last time around, wondering what's driving that wider range? And maybe if you can share some of the assumptions around liquids prices. And then I wanted to check as well in terms of the timing of this extra production and cash flows over the next few years. Is that quite evening spread over the next 5 years or more back-end-loaded?

Thank you, Henri. Definitely, as we bring more incremental production, as we say, this all reference to the 2021 actual production of gas. And our plan every year, we are bringing additional production. So that will be reflected on the additional operating cash flow that we will be receiving from these increments. Anything regarding the range, Ziad?

So I mean, this additional production and therefore, the cash flow will start -- actually, we're starting this fourth quarter, and then it will ramp up. So you'll see it as we ramp up the production of the gas, a lot of it is back loaded. I didn't understand the first question.

About the range. If I can just intervene on that one, Henri, I wouldn't think if there's a widening of the range and greater uncertainty. I think of it in terms of the base being increased from 9% to 12%, and there's additional further upside reflected in the 12% to 15%. So think it's taking the whole thing up, and it's coming from no changes in price assumptions. It's more reflective of the scale of the volume potential. The next question is from Irene Himona of Bernstein.