For Saudi Aramco, there are few things more comforting than a recovering global economy: The oil giant announced its highest quarterly profit in eighteen months on Tuesday.
What does that mean?
Aramco had a tough time last year when demand for and oil prices went into freefall and profits fell 44% year over year. But as the world looked to the future and investors could almost feel the economy recover, the price of oil began to rise. The dark nectar is used in everything from transportation to manufacturing, after all, and more economic activity (all others equal) leads to higher prices – 30% more this year to be precise. And that translates into higher revenue for oil producers – like Aramco – who clear it up and sell it on.
Why should I care?
For markets: dividends are dead, long live the dividend.
One of the main attractions of the oil companies is the regular cash payouts they offer to investors – a reward for taking the risk of getting their stake in them. These dividends are so important to Aramco’s investors that the company even borrowed money a few months ago to make sure it could keep paying them. And it may have to do the same thing all over again: the dividend of nearly $ 20 billion in the first quarter was higher than “free cash flow” – or the amount of cash it generated after the necessary reinvestment in the business. In other words, the only way Aramco could make up the difference would be by dipping into its own cash reserves – an unsustainable long-term move.
The big picture: Oil companies stay in step.
Aramco isn’t the only oil major seeing improvement: ConocoPhillips announced positive results Tuesday after benefiting from a severe freeze in parts of the US that drove up gas prices. And Total – one of the largest green energy investors among energy companies – posted profits in the first quarter that had all but recovered from the pandemic.