Saudi Aramco, the world’s preeminent oil exporter, today announced a significant 22% decline in its second-quarter net profit, primarily attributed to lower revenues and an increase in its debt burden. The results underscore the volatile nature of global energy markets and the complex challenges facing even the most robust players in the hydrocarbon sector.

The state-controlled oil giant reported a net profit of $22.7 billion for the three months ending June 30, 2025. This figure fell short of the company-provided median estimate of $23.7 billion from a consensus of 17 analysts, signaling a tougher quarter than anticipated by market watchers. This performance comes amidst a backdrop of fluctuating crude oil prices and an intensified global push towards energy diversification.

The Numbers Behind the Drop: A Deep Dive into Financial Performance

Aramco’s financial health in the second quarter was directly impacted by a notable dip in the average realised crude oil price. The company reported an average price of $66.7 a barrel in Q2 2025, a significant reduction from $85.7 in the corresponding period of 2024. This downward trend was also evident when compared to the first quarter of this year, which saw prices average $76.3 a barrel. Such a sharp decline in the per-barrel price naturally translates to lower revenue for a company whose core business revolves around oil extraction and sales.

Beyond revenue, Aramco’s balance sheet revealed an increase in indebtedness. Total borrowing climbed to $92.9 billion as of June 30, up from $74.4 billion a year prior. This rise in debt is reflected in the company’s gearing ratio, a crucial financial metric. Gearing, which measures a company’s reliance on debt as a source of capital, rose to 6.5% from a negative 0.3% a year earlier and 5.3% in the preceding quarter. A negative gearing ratio typically indicates that a company has more cash and investments than debt, suggesting a very strong financial position. The shift from negative to positive, and then an increase, highlights a strategic or reactive change in the company’s financial structure, likely to fund ongoing operations, capital expenditures, or maintain dividend payouts amidst lower cash flow.

Free cash flow, a key indicator of a company’s ability to generate cash after accounting for capital expenditures, also saw a substantial drop. It fell by nearly a fifth year-on-year in the second quarter, settling at $15.2 billion. This reduction in available cash further explains the need for increased borrowing and the pressure on dividend distributions.

Global Oil Market Dynamics: A Headwind for Hydrocarbons

The decline in Aramco’s profitability is not an isolated event but rather a symptom of broader shifts and challenges within the global oil market. The second quarter of 2025 was characterized by a confluence of factors that put downward pressure on crude prices.

One significant element was a noticeable weakening in global oil demand. Signs of cooling economic growth, particularly from China, a powerhouse consumer of energy, contributed to this softening. China’s economic performance has a disproportionate impact on global oil demand, accounting for a substantial portion of overall consumption. Any slowdown in its industrial activity or consumer spending quickly reverberates through commodity markets. Simultaneously, renewed trade war anxieties between the United States and China further dampened market sentiment, adding another layer of uncertainty to the demand outlook.

On the supply side, increased production from various sources exacerbated the price decline. The Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, signaled plans to boost production in July, contributing to existing oversupply concerns. This move, coupled with a surge in global inventories, created a challenging environment for oil prices. Furthermore, non-OPEC+ countries, particularly in the Americas, have continued to drive supply growth, adding more barrels to an already well-supplied market. The International Energy Agency (IEA) in its “Oil 2025: Analysis and Forecast to 2030” report, highlighted that global oil supply is likely to outpace demand in both 2025 and 2026, creating a volatile picture for long-term fundamentals. The IEA’s Executive Director, Fatih Birol, emphasized that their expectations for demand growth are significantly less than the projected supply growth, underscoring the structural imbalance.

Geopolitical tensions, while often leading to price spikes, also contributed to volatility. While some regional conflicts infused uncertainty, the underlying supply-demand trends painted a bearish picture for prices. The natural gas market also experienced heightened volatility in the first half of 2025. A milder-than-expected winter in major consuming regions initially pushed prices lower, but a rebound occurred in Q2 due to unseasonably hot weather in Asia and North America, boosting cooling demand. Supply disruptions, including maintenance delays at major LNG export facilities, further tightened gas markets, but the overall trend for natural gas supply growth is expected to outperform oil.

Rising Debt and Gearing: A Closer Look at Aramco’s Financial Health

The increase in Aramco’s debt and gearing ratio warrants closer examination. In financial terms, “gearing” refers to the proportion of a company’s capital that is financed by debt rather than equity. It’s a critical indicator of a company’s financial leverage and stability. A higher gearing ratio generally suggests a greater reliance on borrowed funds, which can amplify returns when times are good but also magnify losses during downturns.

Aramco’s gearing ratio rising from a negative 0.3% to 6.5% within a year signifies a strategic shift. A negative gearing indicates that the company’s cash and short-term investments exceed its total debt, a position of immense financial strength. The move into positive territory and its subsequent increase suggests that Aramco is actively taking on more debt to fund its operations, capital expenditures, and crucially, its dividend commitments. This strategy, while potentially increasing financial risk, is often employed by companies seeking to capitalize on growth opportunities or to maintain shareholder payouts during periods of lower operational cash flow. For a company of Aramco’s scale, with vast reserves and low production costs, this might be a calculated move to bridge the gap between current earnings and ambitious investment plans.

The total borrowing of $92.9 billion at June 30, 2025, compared to $74.4 billion a year prior, illustrates the magnitude of this increased leverage. This additional debt is being used to support the company’s significant capital expenditure program and its commitment to shareholder returns, even as free cash flow dwindles.

Dividends: The Kingdom’s Lifeline and Aramco’s Balancing Act

For the Kingdom of Saudi Arabia, which holds an overwhelming majority stake in Aramco (81.5% directly and another 16% through its sovereign wealth fund, the Public Investment Fund (PIF)), the company’s dividends are far more than just shareholder returns; they are a critical lifeline for the national budget. Oil revenue constituted 62% of the Saudi government’s income last year, highlighting its profound dependence on hydrocarbon exports.

Aramco confirmed a total dividend payout of $21.3 billion for the second quarter. This includes approximately $200 million in performance-linked dividends, a mechanism introduced in 2022 following the windfall profits from surging oil prices after Russia’s invasion of Ukraine. However, the outlook for 2025 painted a starker picture. Aramco had previously outlined total dividends of $85.4 billion for the year, representing a substantial 37% drop from the over $124 billion payout in 2024. The performance-linked component is set to plunge by a staggering 98% to just $900 million, a direct consequence of the company’s dwindling free cash flow.

This decline in dividend payouts poses a significant challenge for the Saudi government. The International Monetary Fund (IMF) estimates that the kingdom requires oil prices to be above $90 a barrel to balance its 2025 budget. Specifically, the IMF’s breakeven fiscal oil price for Saudi Arabia in 2025 is estimated at $90.93883 per barrel. With global crude benchmark Brent trading at $68.83 at 0625 GMT on the day of the announcement, the gap between the current market price and the fiscal breakeven point is substantial. This disparity underscores the immense pressure on Riyadh to find alternative revenue streams and accelerate its economic diversification efforts.

Strategic Maneuvers: Diversification and Funding Initiatives

In response to market pressures and the imperative to diversify, Aramco has been actively pursuing various strategic initiatives, including significant fundraising efforts. Reuters reported last month that Aramco is nearing a deal to raise approximately $10 billion in investment from a consortium led by BlackRock. This substantial investment is earmarked for the infrastructure of Aramco’s ambitious Jafurah gas project.

The Jafurah project is a cornerstone of Saudi Arabia’s strategy to significantly boost its natural gas production. It is one of the largest unconventional shale gas developments outside the United States and is crucial for the kingdom’s plan to increase gas output by 60% by 2030. The aim is to utilize this increased gas supply for domestic power plants, thereby freeing up more crude oil for export, and also for potential export markets. The BlackRock-led deal is structured similarly to previous infrastructure agreements from 2021, where investors acquired a stake in new entities that held long-term leasing rights over existing pipeline networks. These entities then lease the usage rights back to Aramco, providing a stable revenue stream for investors through tariffs on gas flows, often underpinned by minimum volume guarantees. Crucially, Aramco maintains a controlling 51% stake and full operational command of these vital assets, ensuring strategic control while bringing in external capital. This type of financing allows Gulf oil-producing countries to raise funds for diversification efforts while offering investors a predictable income stream.

In addition to the BlackRock-led deal, Aramco is reportedly considering the sale of up to five of its gas-powered power plants, a move that could generate up to $4 billion. These divestments are part of Riyadh’s broader strategy to press Aramco to increase its profit and payout, even as the global energy landscape evolves. By divesting non-core assets and bringing in external investment for infrastructure, Aramco aims to optimize its capital structure and free up funds for its core upstream and downstream operations, as well as its burgeoning new energy ventures.

Vision 2030: The Grand Economic Transformation

The financial performance of Saudi Aramco is intrinsically linked to the ambitious national blueprint known as Saudi Vision 2030. Launched by Crown Prince Mohammed bin Salman, Vision 2030 is a comprehensive government program designed to fundamentally transform Saudi Arabia’s economy, society, and culture, reducing its historical reliance on oil. The vision unfolds in multi-year phases, with the first phase focusing on foundational reforms and the second phase, currently underway, accelerating efforts with enhanced strategies and significant investments.

The Vision is structured around three core themes: “A Vibrant Society,” “A Thriving Economy,” and “An Ambitious Nation.” Underpinning “A Thriving Economy” are several key objectives directly impacted by Aramco’s performance and the broader energy market. These include:

• Growing the Private Sector: Enhancing the ease of doing business, privatizing selected government services, and attracting foreign direct investment are crucial for creating a dynamic, diversified economy.
• Maximizing Value from the Energy Sector: This involves increasing the localization of the oil and gas sector, boosting gas production and distribution capacity, developing oil and gas-adjacent industries, and significantly growing the contribution of renewables to the national energy mix. Aramco’s investments in gas projects like Jafurah and its ventures into new energies directly support this pillar.
• Unlocking Potential of Non-Oil Sectors: This is perhaps the most ambitious aspect, focusing on developing mining, the digital economy, promising manufacturing industries, and crucially, the tourism sector. Mega-projects like NEOM, the Red Sea Project, and Qiddiya are central to this transformation, requiring massive capital injections.
• Growing the Public Investment Fund (PIF): The PIF is envisioned as the primary engine of growth for Vision 2030. Its assets are being expanded to unlock new sectors, localize edge technology, and build strategic economic partnerships globally. As a major shareholder in Aramco, the PIF’s ability to fund these projects is directly tied to the dividends it receives.

The current oil price environment and Aramco’s reduced profitability put additional strain on the funding mechanisms for these monumental projects. Hence, Aramco’s efforts to optimize its capital structure through debt and asset sales become even more critical for the successful realization of Vision 2030.

Aramco’s Resilience and Future Outlook

Despite the challenging second quarter, Aramco’s leadership remains confident in the company’s long-term strategy and resilience. Amin H. Nasser, Aramco President & CEO, commented on the results, stating, “Aramco’s resilience was proven once again in the first half of 2025 with robust profitability, consistent shareholder distributions and disciplined capital allocation. Despite geopolitical headwinds, we continued to supply energy with exceptional reliability to our customers, both domestically and around the world.”

Nasser further expressed optimism regarding future oil demand, anticipating that “oil demand in the second half of 2025 to be more than two million barrels per day higher than the first half.” This projection suggests a belief in a rebound in global economic activity and continued reliance on hydrocarbons. The company’s long-term strategy, he reiterated, is consistent with the belief that hydrocarbons will continue to play a vital role in global energy and chemicals markets.

Aramco is not standing still; it continues to invest in various initiatives aimed at futureproofing its business. These include significant investments in new energies, digital innovation with a focus on Artificial Intelligence (AI), and advancements in carbon capture technologies. Recent milestones in 2025 include progress towards its gas production growth target, global retail expansion, and the advancement of its petrochemicals strategy. The company also completed the acquisition of a 50% equity interest in Blue Hydrogen Industrial Gases Company and launched a CO2 Direct Air Capture pilot plant, showcasing its commitment to lower-carbon energy solutions.

Furthermore, the strong global demand for Aramco’s recent $5.0 billion bond issuance highlights continued investor confidence in the company’s robust financial position, resilience, and long-term strategy, even amidst market volatility. This access to capital markets is crucial for funding its ambitious growth and diversification plans.

The Broader Energy Transition Landscape

Aramco’s Q2 performance also serves as a microcosm of the broader global energy transition. While fossil fuels continue to dominate the energy mix, there’s an undeniable shift in investment patterns. The International Energy Agency (IEA) reported that global energy investment is set to reach a record $3.3 trillion in 2025, with clean energy technologies attracting twice as much capital as fossil fuels. Investment in renewables, nuclear, grids, storage, low-emissions fuels, efficiency, and electrification is projected to hit $2.2 trillion, driven by emissions reduction targets, energy security concerns, and cost-effectiveness. In contrast, investment in oil, natural gas, and coal is expected to reach $1.1 trillion.

This “Age of Electricity” is rapidly approaching, with electricity investments now significantly outpacing those in fossil fuel supply. Spending on low-emissions power generation, led by solar PV, has almost doubled in the past five years. For traditional oil giants like Aramco, this landscape presents both challenges and opportunities. While demand for hydrocarbons may face long-term pressures, the transition itself requires massive investment in infrastructure, new technologies, and diversified energy sources. Aramco’s strategic moves into gas, petrochemicals, and new energies like blue hydrogen and carbon capture reflect its adaptation to this evolving environment, aiming to remain a dominant force in the global energy sector, albeit one with a broader portfolio.

Conclusion: A Balancing Act in a Dynamic World

Saudi Aramco’s 22% drop in second-quarter net profit is a stark reminder of the inherent volatility in the global oil market. Lower crude prices, coupled with rising debt and a significant reduction in future performance-linked dividends, present a complex financial picture for the world’s largest oil producer.

However, the company’s strategic responses—including its aggressive pursuit of external funding for critical gas projects like Jafurah and potential asset sales—underscore its determination to navigate these headwinds. These efforts are not just about maintaining profitability; they are inextricably linked to the ambitious goals of Saudi Vision 2030, which seeks to fundamentally transform the kingdom’s economy away from its oil dependence.

Aramco’s ability to adapt, invest in diversification, and maintain investor confidence will be crucial in the coming years. As the world continues its multifaceted energy transition, the balancing act between maximizing value from traditional hydrocarbons and strategically pivoting towards new energy frontiers will define Saudi Aramco’s trajectory and, by extension, a significant portion of Saudi Arabia’s economic future. The coming quarters will reveal how effectively this energy titan can continue to deliver on its commitments amidst a constantly shifting global landscape.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

5th August, 2025