The flames of war in the Middle East ignited huge profits of 100 dollars per barrel! Oil giant Saudi Aramco's Q2 profit surged 33%, but Red Sea shipping is in jeopardy
The Zhitong Finance App learned that global oil and gas giant Saudi Aramco (ARMCO) announced a sharp 33% increase in second-quarter profits, benefiting from the sharp rise in international oil prices driven by the US-Iran war since February, while maintaining large-scale oil exports based on the Yanbu port in the Red Sea through oil pipelines that bypass the Strait of Hormuz. Furthermore, in terms of market-focused profit data, according to the performance statement released on Tuesday, adjusted net profit rose sharply from US$25.2 billion in the same period last year to US$33.4 billion, exceeding analysts' profit expectations of US$31.1 billion compiled by Bloomberg.
As the complete blockade of the Strait of Hormuz triggered the largest oil supply disruption crisis in human society's history, the international oil price benchmark, the average price of Brent crude oil futures in the quarter was close to 97 US dollars per barrel, and Saudi Aramco's direct crude oil sales price in the second quarter was as high as 108.10 US dollars per barrel, almost double that of the same period last year.
Oil prices, which have continued to rise since this year, have driven North American oil and gas giants Chevron, ExxonMobil, and Saudi Arabian-based energy giant Saudi Amirun to rise sharply — mainly because the company switched most of its exports to the Red Sea rather than the Strait of Hormuz; but now, as Iran-backed Houthi forces in Yemen threaten to continue attacking tankers using this route, the company faces a high level of risk at the growth level.
Regarding the latest situation between the US, Iran, and the Middle East, diplomatic and military threats seem to be escalating simultaneously. As of August 4, Trump claimed that negotiations between the US and Iran were ongoing, and warned Iran that this was the “last chance” before reaching an agreement, otherwise it might face a “beheading” attack; he had previously cancelled another round of authorized “large-scale attacks.” Iran, on the other hand, denies that it is currently conducting or planning direct negotiations with the US, saying that currently it is only discussing the management of the Strait of Hormuz through Oman. Meanwhile, a cargo ship was reported to have been hit by an unknown object near Hormuz. On the same day, only six ships passed through the strait, indicating that actual shipping is still far from normal.
As a result, the market is highly dualized: once negotiations lead to the reopening of Hormuz, war premiums may quickly return — Brent crude oil fell by about 7% to $83.77 due to hopes for peace talks on August 3; if the US imposes a “beheading” threat and Iran continues to use the Red Sea and Gulf energy infrastructure as a lever for negotiations, oil prices, shipping rates, and energy stock profit expectations may rise sharply again.
The Middle East war premium ignited a “petroleum cash generator,” but the Red Sea route became a new risk frontline
Saudi Aramco CEO Amin Nasser said in a statement that since this year, the company has relied on “strategic infrastructure such as east-west oil pipelines, storage capacity, and multiple export terminals” to ensure continuous business operations during this round of war in the Middle East. He said this helped the company “maintain oil production and exports while advancing key projects.”
Saudi Aramco said its critical infrastructure was targeted in multiple military attacks in July, and the company is still evaluating the impact of these attacks on its business model operations and financial performance. Saudi Aramco said the attack had not had a significant negative impact on its performance or operations by the end of the quarter.
Saudi Aramco, which is state-owned by the Saudi government, has also benefited from soaring prices of petroleum products such as diesel and aviation fuel, which often surpass crude oil. Even after the US and Iran reached an interim peace agreement, the price of Brent crude oil once fell below 75 US dollars per barrel, and the price of refined oil products remained at an all-time high.
Saudi Aramco operates several large refineries along the Saudi Red Sea coast. The company previously said in a presentation that it is continuing to maximize exports of such fuels to take advantage of higher prices and profit margins.
These exports are increasingly at risk as the Houthis attack on ships. Related attacks have opened a new front for the war and threatened the transportation of millions of barrels of Saudi crude oil and refined oil products. If Red Sea supply is severely interrupted for a long time, the global oil supply-side market will be further impacted; at a time when maritime traffic through the Strait of Hormuz is still severely restricted, international oil prices will also be further boosted at that time.
The company anticipates that the global oil inventory recovery will provide strong support for demand. In the second quarter, the average sales price of Saudi Aramco crude oil was about US$108.10 per barrel, compared to only about US$66.70 in the same period last year. Liquid production declined by 28% to 7.57 million barrels per day; natural gas production fell 16%.
The company maintained an underlying dividend of around $21.9 billion, which is critical to Saudi Arabia's public finances and to maintain international capital's bullish confidence in the Saudi stock market. Saudi Aramco's balance ratio — an indicator of a company's debt level — rose from 4.8% at the end of March to 6.2% at the end of June. Free cash flow — that is, data on the remaining cash flow from operating activities after deducting investments and expenses — was approximately $12.3 billion as of the second quarter, insufficient to cover dividend expenses.
A brief peace agreement reached in mid-June enabled the Gulf countries to temporarily increase exports through the Strait of Hormuz.
Although the latest round of intensifying geopolitical wars once again restricted this route, Saudi-led OPEC+ agreed to further increase production and continue to lift previous long-term restrictions on crude oil production. As oil-related production and export activities in the Gulf region are still significantly constrained, this move is currently more symbolic; but it will eventually enable Saudi Arabia to increase production to close to 10.5 million barrels per day.
The blockade of Hormuz and Yanbu transportation continue to be threatened, but Saudi Aramco and other oil giants are still sharing the oil price dividends brought about by the war
Saudi Aramco's performance showed clear characteristics of “strong profits and poor cash conversion.” In addition to adjusted net profit of US$33.4 billion, GAAP net profit for the second quarter was US$32.69 billion, up 44% year on year; operating cash flow was US$25.4 billion and free cash flow was US$12.26 billion, down about 19.5% year on year, mainly affected by the use of US$13.6 billion in working capital; capital expenditure increased 7% year over year to US$13.17 billion, and ROACE rose from 20.3% to 22.1%.
The company paid a basic dividend of US$21.89 billion, which meant that the free cash flow for the quarter only covered about 56% of the basic dividend, and the debt ratio also rose from 4.8% at the end of March to 6.2% at the end of June. Adjusted profit for the first half of the year increased by about 29% year on year to US$67.18 billion, but free cash flow fell by about 10% to US$30.9 billion. As a result, high oil prices improved the profit sheet significantly, but it has not been fully converted into more abundant distributable cash. At the operating level, the company maintains a supply reliability rate of 98.4%. The Zuluf production increase project is expected to be completed in 2026, while the Fadhili expansion and Jafurah phase II are scheduled to be put into operation in 2027 to provide support for medium-term crude oil production and natural gas growth.
Combined with the results of the two major North American energy giants, ExxonMobil and Chevron, announced last Friday, the fundamental conclusion about energy stocks is very clear: high oil prices and refining profit margins soared in the second quarter of this year, which is a major benefit for the comprehensive oil giants. ExxonMobil achieved GAAP profit of 14.5 billion US dollars, adjusted profit of 14.7 billion US dollars, operating cash flow of 23.6 billion US dollars, and free cash flow of 17.2 billion US dollars. The upstream adjusted profit reached 9.19 billion US dollars, the energy products business reached 4.1 billion US dollars, and set a record for diesel production in the second quarter.
Chevron's net profit was US$12.1 billion, nearly quadrupling from US$2.5 billion in the same period last year, with adjusted profit of US$12 billion, operating cash flow of US$22.6 billion and adjusted free cash flow of US$15.4 billion. Upstream profit increased 200% year-on-year, global production reached about 4 million barrels of oil equivalent per day, and refining business profit rose to US$4.9 billion. The difference is that Chevron's exposure to production in the Middle East is relatively small, so it has more fully reaped the dividends of rising prices; Saudi Aramco and Exxon also experienced production stoppages or logistics disruptions in the Middle East. In other words, the rise in oil prices is beneficial for all three, but geographical dispersion, refining and chemical allocation, and shipping exposure determine the “purity” of the dividends.
The Houthis continue to threaten the port of Yanbu and the Red Sea energy route, which is essential for Saudi energy transportation, which means that the “strategic backup channel” that Saudi Arabia originally used to bypass the Strait of Hormuz is also under pressure. The international oil market has escalated from a single Hormuz Strait energy transportation risk to a double bottleneck risk in the Strait of Hormuz and Mande. Six Saudi supertankers have already turned around the Cape of Good Hope in the Gulf of Aden, increasing their voyage by at least 25 days. The London insurance market has also expanded the high-risk area of the Red Sea; the Houthis also claim to have attacked crude oil transportation facilities connecting the eastern Saudi oil fields to Yanbu Port.
However, Yanbu shipping continues, and Aramco's supply reliability rate is still high, indicating that currently it is more about rising risk premiums, insurance premiums, and transportation cycles, rather than the complete suspension of Yanbu exports. As far as oil prices are concerned, if transportation to Yanbu in the Red Sea continues to be blocked, it will reduce effective capacity, push up the price difference between diesel and aviation coal cracking, and cause oil prices to show a clear upward trend; as far as Saudi Aramco's basic situation is concerned, it is a double-edged sword that “rising sales prices benefit profits, logistics costs, and harms cash flow from port crude oil export risks.”