Prince’s Late-Night Dividend Announcement May Help Aramco

The Saudi Arabian crown prince’s late-night announcement that Aramco could reduce payouts to the state will potentially alleviate the strain on the oil giant’s balance sheet.

The details are still unclear -- the move took investors by surprise and the company said on Thursday it was still committed to paying dividends.

But the move could free up some of the $73.5 billion of annual dividend payments Aramco makes to the government, which owns 98% of the company. Payouts to minority shareholders, who get roughly $1.5 billion, will be maintained -- as promised in the terms of a 2019 initial public offering.

The world’s largest oil company has seen its debt levels soar in the last year due to the coronavirus-triggered collapse in energy prices and its $69 billion acquisition of chemicals maker Saudi Basic Industries Corp. The Dhahran-based firm had to cut spending and borrow more to pay the dividend for 2020, with free cash flow falling substantially below that level to $49 billion.

Crown Prince Mohammed bin Salman said on Tuesday that 24 of the kingdom’s biggest companies could decrease their dividends and instead contribute 5 trillion riyals ($1.33 trillion) of domestic capital spending over the next 10 years. Around 60% of that money will come from Aramco and Sabic, the 35-year-old de facto ruler said.

He said the extra investment from the firms would boost the economy.

“Capex only drives higher long-term growth if it is on productive projects which create value and jobs,” said Hasnain Malik, the head of research at Tellimer in Dubai. “Otherwise, this is simply a case of the government reallocating capital in a centralized, command-economy fashion, further neutering the private sector.”

The prince didn’t specify by how much Aramco might cut its government payout, or whether the company could retain some of the money on its balance sheet instead of investing it all.

Aramco’s dividends represent about one third of the Saudi government’s total revenue.

The firm “remains committed to ensuring free cash flow to support dividend distributions through various market conditions and crude oil price cycles,” it said in a statement to Bloomberg on Thursday.

Prince’s Late-Night Dividend Announcement May Help Aramco

Aramco’s shares rose 2.7% on Tuesday, the most since May, to 36 riyals. Trading volumes were more than four times the average of the past month, data compiled by Bloomberg showed.

The new plan comes after the pandemic and oil shock pushed Saudi Arabia into recession and set back the government’s goal of slashing unemployment and diversifying the economy.

Aramco said earlier this month that capital spending in 2021 would be $35 billion, down from earlier guidance of as much as $45 billion. The company has a raft of projects on the horizon, including fulfilling a government edict to increase its total oil production capacity to 13 million barrels a day, from 12 million a day.

©2021 Bloomberg L.P.

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