(Bloomberg) -- Saudi Aramco will have a crucial decision to make early next year: Cut its $31 billion quarterly dividend and risk worsening the kingdom’s budget deficit, or keep borrowing to maintain the payout.
The world’s biggest oil exporter is a key cog in the Saudi financial system with its crude sales and generous payouts helping fund Crown Prince Mohammed Bin Salman’s multitrillion-dollar spending plans. The kingdom’s budget is getting stretched as oil prices remain subdued while production stays near the lowest levels in three years.
The dependence is putting increasing stress on Aramco’s balance sheet as it’s distributing more than it’s earning, flipping the company into a net debt position in the third quarter. It’s a sharp turnaround for the firm that had over $27 billion in net cash just a year ago.
It’s common for large oil companies to use their balance sheets to boost borrowings during periods of low oil prices to be able to keep paying shareholders. Aramco is no different. It sold about $8 billion of dollar bonds in 2020 as the Covid-19 pandemic was driving crude lower, and another $6 billion the following year. Raising debt isn’t necessarily a bad thing, given its low leverage, Chief Financial Officer Ziad Al-Murshed has said on recent conference calls.
Its gearing — net debt to equity — of about 2% is low compared with double digits leverage for most global oil majors, according to Bloomberg Intelligence data. The company had $8.9 billion of net debt in the third quarter while BP Plc’s was $24 billion and Shell Plc $35 billion.
“Leverage is still low and another tool used globally by large corporates so as not to cut dividends when cash flows fluctuate,” said Anita Gupta, head of equity strategy at Dubai lender Emirates NBD PJSC.
Two-Part Dividend
Aramco’s dividend is made up of two parts: a base payment of $20.3 billion a quarter that consumes about 95% of free cash flow, and a performance-linked portion pegged at $10.8 billion each quarter this year. The special component, initially based on the huge profits from oil’s boom following Russia’s invasion of Ukraine, is set to be paid as a percentage of free cash flow starting next year.
There’s room for Aramco to borrow more, which can help maintain the dividend near current levels, according to HSBC Holdings Plc analyst Kim Fustier.
Allowing the balance sheet gearing to end 2025 at about 10% “would free up or give the company the ability to pay something like a $30 billion special dividend in 2025,” Fustier said in an interview in September.
That would be a boon for the government budget. The kingdom in October forecast a deeper deficit than previously estimated, and the shortfall is seen through to 2027. It needs crude at near $96 a barrel to balance its budget, far higher than current prices. Export revenue from oil fell to the lowest in three years in August.
Aramco raised $6 billion of bonds in July in what was its first dollar-debt offering in three years. It sold another $3 billion in dollar-denominated Islamic bonds in September. More borrowings would also add to the $50 billion the Saudi government and entities like its Public Investment Fund have issued in bonds in 2024, making it one of the biggest issuers of international debt in emerging markets this year.
Still, the weak outlook for oil means Aramco would need to be careful not to put too much stress on the balance sheet. Saudi Arabia and others in the OPEC+ alliance on Sunday delayed a gradual increase in production for a second time to next year as crude prices continue to struggle amid a fragile economic outlook. Brent crude in London has declined 13% in the past four months.
“Aramco still has a strong balance sheet and robust financial position, so the dividend can be maintained into 2025 if management is comfortable with higher leverage,” Bloomberg Intelligence analyst Salih Yilmaz said. “However, this is not sustainable in the long-term.”
--With assistance from Omar Tamo.
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