If you go back to 2007, when the iPhone was in its infancy and Facebook had only been around for a couple of years, the oil companies ranked among the most valuable in the world. ExxonMobil was the most valuable firm in the world and Chevron was near the top. Formula One cars were spectacularly noisy and the world was far less worried about things such as an energy transition, which means that the fuel produced by these companies was finding its way into cars with larger engines. It was a good time to be a petrolhead (and to own an oilfield), if nothing else.
Fast-forward to today, and oil companies have now made an effort to rebrand themselves as energy companies. The “about us” section of the Saudi Aramco website describes a focus on “energy security for a more sustainable world” — and quickly moves on to the energy transition and a net-zero economy. This industry has changed dramatically over the past two decades, even though the way people get around hasn’t changed nearly as fast as many predicted.
Oil helps things move from A to B. When there’s less demand at B, there’s less need to move things from A
The ESG consultants may have made plenty of money helping these companies change their public image, but one thing has remained the same: oil demand is directly linked to the level of global economic activity. Oil helps things move from A to B. When there’s less demand at B, there’s less of a need to move things from A. Though the Opec cartel does its best to manage supply to boost prices when demand is weaker, there’s only so much it can do. The oil value chain includes vast fixed assets, and you can’t get a return on investment if you aren’t willing to produce the stuff — even at depressed prices.
In dollars, the price of Brent crude is almost exactly what it was 10 years ago. In South Africa, we’ve experienced a different reality in petrol prices, thanks to the rand, but those with steady currencies against the dollar haven’t seen much fuel price inflation. This hasn’t helped oil producers, as their costs certainly haven’t been stagnant over the past decade.
When Saudi Aramco executed its record-breaking IPO in 2019, just 1.5% of the company’s shares were sold to the public. A further sale took place in 2024, raising billions more as Saudi Arabia took steps to fund a budget deficit. It could still raise plenty of money, as the Saudi government holds over 97.6% of the company after the IPO and subsequent offering.
IPO investors haven’t enjoyed any share price growth, though the pandemic in the middle didn’t do long-term oil demand any favours as the world learnt to function with less A to B. The short-term spike in the oil price during the pandemic has washed away, taking Saudi Aramco (and many other names in the sector) with it. The IPO price was 32 Saudi riyals; it now trades below 25, after peaking at more than 38 in 2022.
The bull case has always been around the dividend, with the argument that the Saudi government is dependent on the company for dividend income, meaning any cut to the dividend would be a last-resort strategy. The latest quarterly dividend reflects growth in the base dividend of 4.2% year on year (in dollars), despite net income dropping 4.8% (also in dollars). The bull argument is accurate for the base dividend, but performance-based dividends (a top-up from Covid days) are expected to be much lower this year. The market knows that dividends cannot grow into perpetuity if underlying earnings are under pressure. At some point, even the base dividend will stagnate unless earnings keep growing.
Free cash flow is an even bigger alarm bell than net income, as it fell by nearly 16% in dollars. This was driven by the double-whammy of lower net income and higher capital expenditure, with Saudi Aramco forced to invest in new exploration and energy activities despite having enjoyed no uptick in oil prices over the past decade.
For all the money spent on global sports events and the rebranding of Saudi Arabia, there are glaring risks not only for the country, but for the oil industry as a whole. The world can’t live without oil and may never reach that point, but that doesn’t mean that profit margins in the sector won’t keep compressing.
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