7 Nov

How Is Tesla Pressuring Saudi Aramco’s Earnings?

WRITTEN BY Maitali Ramkumar

Tesla’s (TSLA) earnings have been rising, led by increasing electric vehicle deliveries. Saudi Aramco, one of the largest producers of oil and gas, has reported declining profits driven by falling oil prices. These two companies show contrasting scenarios of leading companies in their industries. However, they have a strong connecting link.

With countries around the globe taking concrete steps to reduce the impact of human activity on the climate, emerging sources of clean energy have rolled into the spotlight. Electric cars improve transportation with a reduction in greenhouse gas emissions and better air quality. Plus, electric vehicles reduce the dependence on traditional fuels such as gasoline that are refined from crude oil.

Tesla at the top of the pile

The world’s leading economies have been implementing stricter emission regulations. China is set to launch its China Emission 6 standards. Plus, Europe is set to launch the Euro Standard 7 emission rules in 2020. With an increasing focus on clean sources of energy, automakers are scrambling to adapt to a low-carbon future.

In such a scenario, it’s no surprise that Moody’s gave Tesla high ratings with respect to its readiness for a transition to a low-carbon environment. Moody’s gave Tesla a CT-1 rating. The average score for the other automakers was CT-6. This readiness scale ranges from CT-1 to CT-9. To learn more about these ratings, please read Tesla Trumps Automakers on Green Score.

With Tesla on top of the low-emissions game, the company is witnessing record sales and improvement in its financials. In the third quarter, the company’s deliveries rose by almost 2% quarter-over-quarter to 97,186 units. Also, the company saw a massive surge in revenues from China and Europe. Tesla’s revenues rose 64% year-over-year in China, 56% in the Netherlands, and 13% in Norway.

Tesla’s peers shift toward electrification

Leading automakers such as Ford (F) and General Motors (GM) are rapidly moving toward vehicle electrification. Ford expects to earn a majority of its revenues in Europe from electric cars by 2020. The company is in the process of releasing a series of electrified variants of its popular models in the region over the next few years.

Ford has already started producing a mild-hybrid version of the Puma Crossover for its European markets. General Motors also has extensive plans for electrification of its vehicles.

Impact of electrification on oil producers

Automakers are investing heavily in the electrification process. This trend should eventually impact the demand for crude oil–based fuels, ultimately affecting the demand for oil. A reduction in demand for fuel would hit every link in the value chain, from retailers to refiners to crude oil producers. Lower demand would also strike crude oil prices, the primary determinant of upstream earnings for energy companies.

Leading oil companies such as Saudi Aramco would feel the heat of the reduction in demand and oil prices. These companies are already facing harsh business conditions with lower oil prices. Aramco’s earnings fell from $83.3 billion in the first nine months of 2018 to $68.2 billion in the first nine months of 2019 due to falling oil and gas realizations. Notably, Saudi Aramco’s IPO was delayed due to its lower-than-expected valuation, again led by weaker oil prices.

Oil companies such as ExxonMobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) are facing declining earnings due to lower oil prices. In the third quarter, ExxonMobil’s upstream earnings slumped by 49% year-over-year to $2.2 billion, led by lower realizations. Similarly, Chevron and Shell’s year-over-year upstream earnings plunged by 39% and 52%, respectively, in the quarter.

Outlook

Most analysts expect oil prices to remain weak due to the global supply glut, led by production increases in shale and tight assets in the US. Plus, a slowdown in global economies has been hitting demand growth forecasts.

The rapid move toward electrification, led by Tesla, should eventually impact oil demand growth. As a result, lower demand would lead to a fall in oil prices and earnings for oil majors like Aramco.

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