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

Welcome to Saudi Aramco's Half Year 2026 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 Aramco's Second Quarter 2026 Earnings Call. I'm Peter Hutton, Head of Investor Relations, and I'm pleased to be joined today by Amin Nasser, President and CEO; and Ziad Al-Murshed, Executive Vice President and CFO. Today, we will provide a detailed update followed by a question-and-answer session. We expect the call to last around an hour. Please refer to this cautionary statement on forward-looking information or regulatory filings and our website for more details. With that, I will hand the call over to Amin. .

Thank you, Peter. Welcome, everyone, and thank you for joining us. The recent quarter was 1 of the most challenging ever in the history of Saudi Aramco. Our results and resilience were tested like never before. But we have continued to overcome the challenges and continue to deliver for our shareholders. We have demonstrated great agility and adaptability in the face of threats and attacks on our facilities and in finding solutions and workarounds in dealing with the disruption to shipping in the Strait of Hormuz. This time, I would like to acknowledge the efforts of our employees, our contractors and partners who represent and support Aramco Group of companies in Saudi Arabia and around the world. This is the third set of results we have reported since the disruption to global trade by Strait of Hormuz. The prolonged U.S. Iran conflict continues to aggravate the biggest ever energy supply shock in history removing an average of 11 million barrels per day of liquid supply. During this time of unprecedented volatility and uncertainty, our strategy, focus and delivery have been clear and consistent. The consistency is what you expect from Aramco. We balance short-term market events with a long-term vision. It is that steady delivery that has made us a leading global energy partner for our customers and investors. [indiscernible]. In May, we reported the impact of delivering on these plans and actions from both our operations and financial results. And today, we are building further on our strategy continuing to create and capture opportunities in our operations, having developed multiple routes to market, including via the Mediterranean and delivering strong results despite this being the first full quarter where the dips of the crisis applied throughout. The strength of our financial is reflected in second quarter adjusted net income of $33.4 billion, up 33% compared to last year. This includes an exceptional downstream adjusted EBIT of $6.2 billion, around twice that of a year ago. We have delivered these results while maintaining the strongest balance sheet in the industry, with gearing of 6.2% and 22.1% ROACE which is around double the IOC's average. It is this strength, which allow us to continue returning value to our shareholders with our Q2 base dividend up 3.5% year-on-year. In May, we were also clear that the trade disruptions are the most serious we have ever seen in the energy market and that if the fleet did not fully open by the end of that month, the impact would continue well into 2027. As we have seen, trade flows via the Strait have not normalized since then, and the impacts are even more severe. The major stake in by various industry participants such as the use of inventories to mitigate the impact, have had short-term effects. The release of inventories have now being largely deployed and are not only more difficult to be maintained, but now need to be rebuilt from critically low levels. This would require call on additional and restriction of production and that additional production also calls on access to reserves, where we had already highlighted before, that the level of investment has been insufficient from many in the industry and needs to be addressed. We have talked about the advantage of taking a long-term view. This has been demonstrated most visibly in the flexibility built into our present operations. It is also visible in the duration of our reserves maintained consistently and at a low cost, which gives the reassurance in the long term, which we believe others find it difficult to match. This is also a key part of our position as a leading global energy partner. Moving to the macro environment and market dynamics. We see some clear theme. Global oil demand has remained resilient as the supply shock was masked by an estimated 9 million barrels per day of strategic petroleum reserves and commercial inventory withdrawals and around 2 million barrels per day in demand management. The unprecedented liquid supply loss has continued into Q2, and the world lost over 2.6 billion barrels of oil that was distant to a number of critical industries such as food, semiconductors, mobility and petrochemicals. This has been partially offset by alternative flow bypassing Hormuz, the release of strategic petroleum reserve by government and the utilization of Aramco's East West Pipeline, which resulted in reducing the net supply loss to currently around 1.8 billion barrels. The key element of this are: first, the EIA emergency release program of 426 million barrels is coming to an end in August. And with it, the 2 million barrels per day cushion will likely come off the market. Second, after utilizing oil on water and SBR volumes, the world tapped into an estimated 600 million barrels, reflecting 6.5 million barrels per day between May and July of commercial inventory, the only remaining buffer in the system today. Third, within Asia, crude oil imports were reduced by around 6 million barrels per day through a combination of SBR release, drawdown from commercial refined product inventories and demand management. The East-West Pipeline has enabled Aramco to mitigate the impact of the disruption much more than the IA coordinated strategic reserve release. All in all, significant drawdowns of commercial inventories have held but not meant end user demand. The aggregate inventory level globally are not a proper reflection of the current physical market tightness. One needs to look into inventories by region, by product and what is realistically available without pushing the inventory system into operational risk? Third-party estimate only around 10% of these aggregate inventories to be effectively accessible. The rest is locked up in pipeline sales minimum tank levels and other day-to-day operational constraints. In fact, we have seen several system hit operational tank bottom such as the U.S. crude oil stocks at Cushing, which has been at such levels since mid-June. We see an aberrant disconnect between future and physical market as evident in the strong refining margins, that reflects the market tightness. Margins are expected to stay exceptionally strong throughout the second half 2026, supported by limited export availability from key regions like the Middle East, Russia and Asia, resilient fuel demand and persistently low product inventories. The refining system today, excluding trended Arabian Gulf and Russian refineries that have been under attack is stretched and is operating at near maximum utilization rates. Currently, flowed through the Strait of Hormuz are 1/10 of a pre-conflict level. Energy and commodity supply chains will need months to return to the pre-conflict traffic through the Strait of Hormuz as these vessels reroute or avoid being idle. Aramco's integrated export network provides access through the Strait of Hormuz and the Red Sea corridor and from the Red Sea both [indiscernible] and Suez Canal. Let me be clear, demand remains strong and has not been met by supply in the first half of this year, but rather from commercial and strategic inventories. The global economy remains resilient with an estimated second quarter GDV growth of 2.3% and is expected to strengthen towards the end of the year and into 2027. Demand in the second half of the year is expected to be around 2 million barrels per day higher than the first half. Restoring commercial inventories and strategic reserves to become level will materially add to calls on crude oil throughout 2027 and likely beyond. To put this into context, if the Strait of Hormuz was to open today, it would take up to 18 months at an average rate of 2.1 million barrels per day to replenish depleted inventories on top of demand. Since the start of the conflict, over 5 months ago, our response has been both rapid and focused as we have taken many business continuity and strategic decisions to navigate the challenges. As we outlined in May, we have built a high degree of flexibility in our assets, which gives us optionality. We continue to utilize the East West pipeline to secure crude flows across the network and maximize throughput and export from our West Coast refineries and terminals to capture higher margins. To ensure our supply route resilience, we fully deployed our transportation fleet across land and sea. And we optimized site scheduling by sharply reducing turnaround times which resulted in 20% increase in loading capacity at our terminals and a significant improvement in export capabilities. We capitalized on our international storage capability across Asia, Europe and the Middle East. In Kingdom, Multiple new hauling routes were activated and more than 3,000 trucks were utilized to maintain the refined products, local supply. Our management growth and resilience is affirmed by our customers. This trust is because they know they can count on us no matter how challenging the circumstances. Our ability to restore assets and resume operation and sales, optimized state was driven by both our dedicated teams and our strategic supply chain planning. Notably, in the first half, more than 90% of materials were locally sourced for asset restoration without this, lead times would typically take months or up to a year. We created a network that allowed us to resume operations faster than ever before and even 6x faster than industry beers as verified by their party consultant. With our intense focus on maintaining high reliability, enhancing flexibility and optimizing delivery we were able to continue expanding new crude sales outlets even during the contract. Our actions navigating challenges demonstrated our exceptional resilience and operational agility, further reinforcing our role as a leading global energy partner in today's volatile energy landscape. As we look ahead to the rest of 2026 and beyond, we remain concerned that the continued disruption via the Strait of Hormuz and the threats to shipping via the Bab el-Mandeb Strait could have a significant long-term impact on the world economy. With that, let me now hand over to Ziad to provide more details on the strength of our first half and second quarter results.

Thank you, Amin, and welcome, everyone. Amin has talked about operational resilience and how Aramco has built this into our system over decades. This operational resilience clearly translates into financial resilience, driving robust underlying performance under very demanding conditions. We delivered industry-leading results in Q2 with adjusted net income of $33.4 billion stable versus last quarter despite the challenges impacting the full quarter. This is 33% higher compared to last year and driven by increases in both upstream and downstream. Upstream adjusted EBIT was up 14% year-on-year in Q2 at $50.9 billion as we utilize the flexibility that we have purposely built into our assets to optimize supply and crude oil grades delivered through our network to capture price upside. Downstream also delivered excellent results with adjusted EBIT in Q2, up to nearly twice the level a year ago at $6.2 billion. In fact, for the first half, Overall, adjusted EBIT for Downstream was up 144% year-on-year to $11.7 billion. This strong financial performance is further evidence that our integrated operating model performs robustly across volatile and challenging conditions. Looking into Q2 in more detail. Our results highlight how our operational advantage and flexibility translates into exceptional returns. We delivered 12-month rolling ROACE of 22.1%. This is higher than both last quarter and last year, even as we experienced the most severe disruption we have ever seen. In Upstream, realized prices increased 62% year-on-year to $108.1 per barrel helped by our success in achieving a record premium of more than $10 per barrel over Brent. This enabled us to fully compensate for the effects of a lower production volume at 9.5 million barrels per day of oil equivalent and to deliver strong adjusted EBIT versus last quarter despite the challenges over the full quarter. In Downstream, adjusted EBIT was $6.2 billion, demonstrating the benefits of our integrated operating and trading operations, the geographical diversification of our assets, and our continuous focus on asset reliability across the portfolio, which together enabled us to withstand disruptions and capture the higher margins. Q2 free cash flow, excluding working capital movements, was $25.9 billion, up 42% year-on-year as a result of higher prices. The working capital movement is mainly due to a specific effect in Q2 relating to the normal price equalization mechanism with the government. Let me take a minute to explain this mechanism. For local sales, we are compensated for differences between domestic and international prices, but with a time lag. The significant oil price increase in Q2 led to higher receivables from this compensation mechanism. However, this has now already stopped at diversing and will be fully settled in Q3. So this is just a timing issue. Overall, the effect of this compensation mechanism accounts for the majority of the working capital increase in Q2, which is why we are focusing on free cash flow, excluding working capital for Q2. Again, this was $25.9 billion, up 42% year-on-year. Even with this effect in Q2, our gain at just 6.2% is exceptional and helps provide the resilience and flexibility to match the quality of our operations. Now looking at our performance of the first half as a whole, we see a significant increase in adjusted net income compared to a year ago, which reflects the scale and resilience of our business and our ability to successfully overcome challenges. Both upstream and downstream demonstrated strong year-on-year growth, and our operating cash flow continued to be strong at $56.2 billion. Free cash flow, excluding the working capital build I explained earlier, was $60.3 billion, up more than 50% year-on-year, reflecting the strong underlying cash generation capacity of the business. Gearing in the first half was 0.3 percentage points lower than that in the first half of 2025. This strength in our balance sheet is the first advantage we are building upon. It is marked by our unmatched cash position at more than $60 billion at the end of Q2, our high credit rating with the lowest gearing in the sector and our selective use of bonds, sukuk, commercial paper and innovative financing solutions such as general corporate use of funding from export credit agencies to both diversify and expand our available funding sources whenever required. Our unmatched financial position gives us confidence to invest through cycles and unique opportunities that are mainly available only to us. Despite such financial strength, we maintain our commitment to capital discipline. In the first half of the year, capital investments totaled $25.1 billion and we maintain our guidance of $50 billion to $55 billion for 2026, which excludes our potential investment in HUMAIN. Taken together, this reinforces our objective of maximizing shareholder value, where our sustainable and progressive base dividend has grown 17% since 2022 and our $2 billion to $3 billion share buyback program is progressing with our performance-linked dividend mechanism remaining in place to share upside. For the second quarter, the Board has announced a base dividend of SAR 82.1 billion, equivalent to $21.9 billion, up 3.5% year-on-year. This will be paid on the 27th of August to shareholders who own our shares on the eligibility date of the 19th of August. Before we move to Q&A, let me leave you with 3 key takeaways. First with our maximum sustainable capacity of 12 million barrels per day, we are well positioned to capture value from the higher demand outlook. Recent disruptions have underlined 1 critical fact. Energy security is paramount and global inventory needs to be rebuilt. Second, we have derisked our business over nearly 4 decades through a variety of strategic positions leading to an unmatched asset portfolio. We lead in upstream volume, and we have the agility to ramp up production fast and have significant downstream optionality with multiple supply points and our reserve position is not matched by any peer. These advantages further enhance our capability to capture opportunities. And third, our financials underpinned with superior returns, the lowest gearing in the sector, a visible trajectory of cash flow growth and world-class distributions. This is the Aramco proposition, delivering value for our customers and for our investors even under difficult market conditions. With that, thank you for your attention. Amin, Peter and I are now pleased to take your questions.

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

Thank you very much. And first of all, questions comes from Iyad Ghulam of SNB Capital.

First of all, congratulations on the strong and resilient set of results during such challenging times. I have 2 questions. One is about the -- given the major disruption in oil supplies and drawdowns from global strategic reserves, how should we think about the supply and demand dynamics in the medium term? And if the situation continues, and also with supply, go back to normal quickly if things normalize. The second question is about the Bab el-Mandeb. I understand the situation is very unpredictable nowadays. But how Aramco is dealing with the issue currently.

Thank you, Iyad. The supply demand fundamentals going forward, that all depends. We said earlier that demand is resilient. It was masked because of the interruptions by the additional supply of around 9 million barrels that came from the inventories and SBRs, the IEA and what came from Asia in terms of commission inventories. We strongly believe that because of the need to build additional inventory to replenish the inventories that was consumed during the last couple of months. You are looking at an additional of 2.1 million barrels per day of additional demand just to fill the inventories for -- and to build it to a level -- that is, I would consider insufficient at that time because if you look at our inventory before the crisis, which was a the low end of the 5-year average. This is before the crisis. So we entered the crisis or this conflict with a low inventory, and we need approximately if everything goes back to normal 18 months of additional demand beyond normal demand of 2.1 million barrels just to refill the inventory. Add to that, all the governments now because we are talking with different governments around the world, everybody is trying to add additional storage. So they are going to build because of the need for energy security over the long term and to cater for such disruptions, you will see a significant build of additional inventory. So -- this is the 2.1 million barrels that you are talking about is over the next 18 months of additional demand is just to replenish depleted inventories, not to cater for the additional storage facilities that we are considering because of these disruptions and that everybody now looking at what additional inventory is because we found certain places with very minimal inventory. Some of them in the neighborhood of mainly in certain countries, 2 million, 3 million, 5 million barrels of inventory, which is not adequate to cater for such disruptions. Well, with regard to Bab el-Mandeb, as we said, we have managed some risks to out very effectively for some time. It is always under our consideration. The government tackling this risk and has never limited our option to go through Bab el-Mandeb. We have optionality, as you know, through multiple axes pros and alternative pathways to the Mediterranean, through Sumed pipeline and the Swiss canal. In addition, we have fully established contingency plan. That provides us with a lot of flexibility and resilience to adapt as conditions evolve and enable us to continue to export around 5 million barrels. Bear in mind that any reduction in shipping ground will create serious program to the world, affecting not only the oil and gas sector, but many other areas of global economy such as as I highlighted earlier, agriculture, fertilizer [indiscernible] semiconductor. So there is no impact on our operation on the West Coast. And as I said, we have the optionality, and we continue to export 5 million barrels with that optionality that we have .

Just there was 1 sort of manage to get a third question in there, which was how quickly could we restore to pre-conflict levels. That was .

To pre-conflict level production to be conflict level within days. To go to maximum sustained capacity which is 2 million barrels per day, we can bring it within 3 weeks if we are us.

Thanks, Iyad. Next question is from Biraj Borkhataria of RBC.

And again, obviously, it's an extremely challenging time for the operational people. So congratulations to them and congratulations on the resilient numbers. Just the first question, in your CapEx budget for the year, you usually include a fairly sizable element for inorganic acquisitions. I was just wondering, given the current environment, we're seeing with macro assumptions moving all over the place, is it fair to say we should expect you to slow down a little bit and be more selective on this front? Because I guess it's hard to do deals with the assumptions of the ground? Or are you still seeing things you can execute on? And then the second question is just on your comments, I mean, on the rebuild of storage. Just anything you can highlight from your conversations with customers because obviously, the pace of rebuild and of these storage but crude and products is going to determine how strong oil demand is? Any impacts you can give there would be helpful. .

Thank you, Biraj. I'll take the second part of your question, Ziad will talk about the CapEx. With regard to , I mean, additional storage would require significant build, and it will take time to go beyond the existing inventory that was available prior to the complex. Everybody we're talking to now is looking at additional building additional storage facilities to cater for similar disruptions in the long term because energy security is becoming a priority now when you talk about energy. And as such, we -- it will take time to build this additional storage beyond filling the existing storage facilities that were completed but that type of project is being handled by commercial entities, governments and we are in discussion to see what's available and how long it will take to rebuild these additional facilities and how can we participate in terms of availing some of our crude for storage. Ziad?

Yes. Biraj, on your question on external investments, we're always fiscally disciplined on these. So these are proceeding as is the amount that you see because we're maintaining our capital guidance still at $50 billion to $55 billion. There is a small amount in there. We're maintaining that -- but keep in mind, we also guided that our investment in HUMAIN is not part of this guidance because of ongoing discussions. And so the answer to your question is we're sticking to the plan, but we're maintaining the guidance at $50 billion to $55 billion for this year. .

Thank you, Biraj. Next question is from Henri Patricot of UBS.

Thank you for the update. Two questions, please, from my side. Just the first 1 on the near-term production outlook a lot of volatility, but I was hoping you can perhaps share some comment on this 9.5 million barrel per day of production that we saw in the second quarter. Is that the level that you would be able to maintain in the third quarter, assuming that the Strait remains mostly closed as it is at the moment, other this some for improvement? And then thinking a bit later on, I mean, you are right significant flexibility adoptability that have shown in the past few months and in particular, the benefit of the east-west pipeline. Can you share more details on where you are in terms of perhaps expanding that pipeline? Just a little more attention on that.

Thank you, Henri. The 9.5 million you highlighted is the total hydrocarbon the liquid -- total liquid production in the second quarter, 7.6 million barrels per day. Majority of that is crude. With regard to the East West and our optionality, as I said, we do have the -- always the people think that we have 2 routes, which is Hormuz and Red Sea, Bab el-Mandeb but we do have 3 routes actually through the Mediterranean utilizing the Sumed pipeline and the Suez Canal in terms of exporting our crude. We are looking at actively increasing optionality right now to expand on or adding flexibility. This is currently under execution. Our engineering team is looking at how can we not only expand what we have but at the same time, identifying other routes that we can capitalize on. This is all under work. And with regard to production, as I said, your question is we can -- depending on the situation, we are currently through the issues limited to the pipeline capacity. However, depends on what happened in Hormuz. We remain ready. If the situation normalized in the Strait of Hormuz bring production to pre- conflict levels as I say within days. We can also bring our full maximum capacity of 12 million within 3 weeks, if we are asked to do that. So this is intact, but it all depends on things normalizing the Strait of Hormuz.