The global oil and gas titan Saudi Aramco reported a 33% surge in its second-quarter profit, driven by the sharp rise in international oil prices since the US-Iran war began in February and its ability to sustain large-scale oil exports via the Red Sea's Yanbu port, bypassing the Strait of Hormuz through a pipeline.
As for the key earnings data, according to the performance statement released on Tuesday, adjusted net profit jumped to $33.4 billion from $25.2 billion in the same period last year, exceeding the analyst consensus of $31.1 billion compiled by Bloomberg. The complete blockade of the Strait of Hormuz triggered the largest oil supply disruption crisis in human history, pushing the average price of the international oil benchmark, Brent crude, close to $97 per barrel in the quarter. Saudi Aramco's direct selling price for crude oil in the second quarter hit as high as $108.10 per barrel, nearly doubling year-on-year. This persistently high oil price has boosted the profits of North American energy giants like Chevron and ExxonMobil, as well as the Saudi energy behemoth Saudi Aramco. This is mainly because the company redirected most of its exports to the Red Sea instead of the Strait of Hormuz, but now it faces elevated risks to its growth as the Iran-backed Houthi rebels in Yemen threaten to continue attacking tankers using that route.
Regarding the latest US-Iran and Middle East situations, diplomatic and military threats appear to be escalating simultaneously. As of August 4, Trump claimed that US-Iran negotiations were underway and warned Iran this was its "last chance" to reach a deal before facing a "decapitation" strike. He had previously cancelled another round of authorized "massive strikes." Iran denies that it is currently or plans to engage in direct talks with the US, stating it is only discussing the management of the Strait of Hormuz through Oman. Meanwhile, a cargo ship near Hormuz reported being hit by an unidentified object, with only six vessels transiting the strait that day, indicating that actual shipping is far from returning to normal. The market is therefore in a highly binary state. If negotiations lead to the reopening of the Strait of Hormuz, the war premium could quickly unwind; on August 3, Brent crude fell about 7% to $83.77 due to peace talk hopes. If the US follows through on its "decapitation" threat and Iran continues to use the Red Sea and Gulf energy infrastructure as a bargaining chip, oil prices, shipping rates, and energy stock earnings expectations could be revised sharply upwards again.
The Middle East War Premium Ignites the 'Oil Cash Generator,' But the Red Sea Route Becomes a New Risk Frontline
Saudi Aramco CEO Amin Nasser stated in the announcement that the company has relied on its "strategic infrastructure, including the East-West Pipeline, storage capacity, and multiple export terminals" to ensure continuous operations during the current round of war in the Middle East. He said this helped the company "maintain oil production and exports while advancing key projects." Saudi Aramco indicated that its critical infrastructure was targeted in multiple military attacks in July and that the company is still assessing the impact of these attacks on its business model, operations, and financial performance. Saudi Aramco stated that, as of the end of the quarter, the attacks had not had a significant adverse impact on its results or operations. The Saudi government-owned Saudi Aramco also benefits from surging prices for refined petroleum products like diesel and jet fuel, which often rise faster than crude oil. Even after a temporary peace agreement between the US and Iran briefly sent Brent crude oil prices back below $75 per barrel, refined product prices remained at historically high levels.
Saudi Aramco operates several large refineries along the Saudi Red Sea coast. The company previously stated in a presentation that it is continuing to maximize exports of these fuels to capitalise on higher prices and margins. These exports face increasing risks as Houthi attacks on vessels continue. The attacks have opened a new front in the war and threaten the transport of millions of barrels of Saudi crude oil and refined products. A severe and prolonged disruption of Red Sea supply would further impact the global oil supply market, pushing international oil prices even higher, especially while maritime traffic through the Strait of Hormuz remains severely restricted. The company expects global oil inventory replenishment to provide strong support for demand. In the second quarter, Saudi Aramco's average selling price for crude oil was about $108.10 per barrel, compared to just $66.70 in the same period last year. Liquid production fell 28% to 7.57 million barrels per day, while natural gas production fell 16%. The company maintained its base dividend at approximately $21.9 billion, a payout crucial for Saudi Arabia's public finances and sustaining international investor confidence in the Saudi stock market. Saudi Aramco's gearing ratio, a measure of its indebtedness, rose to 6.2% at the end of June from 4.8% at the end of March. Free cash flow, the cash remaining from operations after capital expenditure and investment, was about $12.3 billion for the second quarter, insufficient to cover the dividend payment.
A brief peace agreement reached in mid-June allowed Gulf states to temporarily increase exports via the Strait of Hormuz. Despite the latest escalation of geopolitical tensions restricting this route again, the Saudi-led OPEC+ still agreed to further increase production, continuing to unwind previous long-term crude output limits. Given that oil-related production and export activities in the Gulf region remain significantly constrained, this move is currently more symbolic. However, it will ultimately allow Saudi Arabia to increase its daily production to nearly 10.5 million barrels.
Hormuz Blockade, Yanbu Transport Under Threat, But Oil Giants Like Saudi Aramco Still Share in the War Premium
Saudi Aramco's results show a clear characteristic of "strong profits but weak cash conversion." Besides the adjusted net profit of $33.4 billion, its GAAP net profit for the second quarter was $32.69 billion, a 44% year-on-year increase. Operating cash flow was $25.4 billion, and free cash flow was $12.26 billion, a year-on-year decline of about 19.5%, mainly due to a $13.6 billion working capital build. Capital expenditure rose 7% year-on-year to $13.17 billion, and ROACE increased from 20.3% to 22.1%. The company paid a base dividend of $21.89 billion, meaning free cash flow for the quarter covered only about 56% of the base dividend, and the gearing ratio rose to 6.2% at the end of June from 4.8% at the end of March. Adjusted profit for the first half of the year rose about 29% year-on-year to $67.18 billion, but free cash flow fell about 10% to $30.9 billion. Therefore, while high oil prices significantly improved the income statement, they have not yet fully translated into more abundant distributable cash flow. Operationally, the company maintained a supply reliability rate of 98.4%. The Zuluf expansion project is expected to be completed in 2026, while the Fadhili expansion and Jafurah Phase II are planned for 2027, providing support for medium-term crude oil and natural gas production growth.
Combined with the results released last Friday by the two major North American energy giants, ExxonMobil and Chevron, the fundamental conclusion for energy stocks is clear: high oil prices and surging refinery margins in the second quarter of this year were a significant positive earnings driver for integrated oil majors. ExxonMobil reported a GAAP profit of $14.5 billion, an adjusted profit of $14.7 billion, operating cash flow of $23.6 billion, and free cash flow of $17.2 billion. Its upstream adjusted profit was $9.19 billion, and its energy products business reached $4.1 billion, setting a second-quarter record for diesel production. Chevron's net profit was $12.1 billion, nearly quadrupling from about $2.5 billion a year earlier, with an adjusted profit of $12.0 billion, operating cash flow of $22.6 billion, and adjusted free cash flow of $15.4 billion. Its upstream profit grew 200% year-on-year, and global production reached about 4.0 million barrels of oil equivalent per day, with refinery profits rising to $4.9 billion.
The difference is that Chevron has a relatively smaller exposure to Middle East production, allowing it to capture the full benefit of the price increases more fully. In contrast, Saudi Aramco and ExxonMobil both faced production shutdowns or logistical disruptions in the Middle East. In other words, the oil price increase was a tailwind for profits for all three, but the "purity" of the benefit was determined by geographic diversification, refining configuration, and shipping exposure. The persistent threat from the Houthis to the port of Yanbu and the critical Red Sea energy route for Saudi transport means that the "strategic backup channel" for bypassing the Strait of Hormuz is also under pressure. The international oil market's risk has escalated from a single point of concern – the Strait of Hormuz – to a dual bottleneck risk involving both the Strait of Hormuz and the Bab el-Mandeb Strait. Six Saudi-flagged supertankers have already turned around in the Gulf of Aden and rerouted via the Cape of Good Hope, adding at least 25 days to the journey. The London insurance market has also expanded the high-risk zone in the Red Sea. The Houthis have also claimed attacks on crude oil transport facilities linking Saudi Arabia's eastern oil fields to the Yanbu port. However, loading at Yanbu continues, and Aramco's supply reliability rate remains high, suggesting that the current impact is more about risk premiums, higher insurance costs, and longer transit times, rather than a complete halt to Yanbu exports. For oil prices, if Red Sea transport via Yanbu continues to be disrupted, it will reduce effective shipping capacity, bolster diesel and jet fuel crack spreads, and give oil prices a clear upward bias. For Saudi Aramco's fundamental outlook, this creates a double-edged sword: "higher selling prices boost profits, while logistics costs and port export risks hurt cash flow."
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