Talk about a self-inflicted wound.
Saudi Aramco, the world’s most valuable company by market capitalization, saw its revenues shrink US$34 billion as the strategy of its biggest shareholder came home to roost.
The Saudi government, which owns 98 per cent of the company, had made the catastrophic decision earlier this year to flood the market with oil at a time when global demand for the commodity was being decimated by the coronavirus. The result was a price depression that has left many oil producers, including Alberta, in a perilous state.
Aramco’s net profit fell 25 per cent in the first quarter, as Brent crude prices fell 65.6 per cent during the period. Aramco has also seen its market cap fall from a peak of US$2 trillion last year to US$1.6 trillion today.
The company’s first quarter free cashflow came in at $15 billion, less than the dividend it paid for the period.
“Effectively, Aramco would be borrowing to pay its dividend, which cannot be sustainable in the long term,” said analysts at AllianceBernstein, according to Bloomberg.
After ordering Aramco to pump oil at record levels over the past few months, Riyadh is now retreating with a decision Monday to cut production by 1 million barrels per day. But the war to gain market share has already cost the Saudi economy billions in lost revenues at a time when it has to spend heavily to prop up the economy hit by the coronavirus.
Saudi Arabia’s foreign exchange reserves — seen as one of its key strengths — has also taken a hit, declining by more than $27 billion in March, the sharpest fall since 2000, leaving reserves at $464 billion, according to Royal Bank of Canada estimates. Brent crude is trading just above US$30 per barrel this morning, less than half of the US$76-price target the kingdom needs to balance its budget.
All this is cold comfort for Alberta that is one of the casualties of the Saudi oil war.
Royal Bank of Canada notes that more Albertans lost their job in March and April (360,000) than in the past four recessions combined. Unemployment rate jumped from an already high of 8.7 per cent in March to 13.4 per cent in April.
But ATB Financial believes the figure paints only half the picture, as the province’s labour force also contracted by 6.2 per cent in April.
“This means that the pandemic-related shutdowns have led many Albertans to drop out of the labour force altogether. The unemployment rate does not include ‘discouraged workers’ who have stopped looking because they don’t think they will find a job,” ATB analyst Rob Roach wrote in a note. “If we include Albertans who want to work but are not in the labour force, the unemployment rate would be a whopping 20.4 per cent.”
While the reopening of the economy and federal aid would be supportive, Alberta’s economy would take a long time to get back on its feet, RBC believes.
“Rock-bottom oil prices and global supply glut won’t help. We expect energy producers to stay in survival mode through 2020 (and possibly beyond), slashing expenditures and trimming output. This will…