Complex Made Simple

Can Saudi Aramco keep its pledge to investors in its 1.5% share sale IPO?

How is Saudi Aramco keeping its promise of $75 bn in dividend payouts amid a revenue crisis?

Oversupply and lack of demand led to massive drops in Brent oil prices reaching below $20 a barrel at one point Aramco’s debt is at 20% of capital, above the range of between 5% and 15% the firm had promised Aramco plans to cut capital expenditure (CAPEX) to $25 billion or less next year

Saudi Aramco is no longer the world’s most valuable company in the world. 

Apple is.

Give Apple credit but COVID-19 conditions heavily favor tech companies over oil producers, on the revenue side.

Nonetheless, Aramco still managed to earn billions in profits, though much below pre-Coronavirus expectations.

And there is that matter of $75bn in shareholder dividend payouts to deal with.

Aramco dealt a blow

In December, when Saudi Aramco listed 1.5% of its shares on the Riyadh stock exchange, it became the world’s most valuable listed company, with a market capitalization of $1.9trn or so. 

Investors were assured that low oil production costs and vast reserves would make it resilient in a downturn. 

At the time, the downturn in question was a global recession looming on the horizon, not a devastating COVID-19 pandemic that obliterated any hopes of an economic revival any time soon.  

A Saudi/Russian oil price war started in April and Aramco pumped 12 million bpd at the height of the standoff. Oversupply and lack of demand led to massive drops in Brent oil prices reaching below $20 a barrel at one point. For every dollar the oil price fell, Aramco’s cash-flow generally declined $1.5bn, according to Neil Beveridge of Bernstein, a research firm.

Aramco subsequently edged down by 6% from its $1.9trn valuation. Apple by the way reached $2trn in valuation on August 19, this year.

On August 9th, the firm reported a 73% year-on-year fall in second-quarter profits.

Read: Is Saudi Aramco laying off foreign employees?

Resilience and keeping the pledge

On August 10th, Aramco’s chief executive Amin Nasser touted the company’s “resilience across oil-price cycles” at least relative to rivals. It still made money, $6.8bn in the three months to June, in contrast to the likes of Royal Dutch Shell and BP which lost $18bn and $16.8bn, respectively.

Aramco’s debt is at 20% of capital, above the range of between 5% and 15% the firm had promised, but blame that on its $69bn purchase of a 70% stake in Sabic previously owned by the Public Investment Fund (PIF).

Aramco has 268bn barrels of crude reserves to flaunt and these long term prospects help keep doubters at bay.

As such, Aramco has also reassured investors that it will meet the minimum $75 billion dividend payout it promised as a condition to selling 1.5% of the company. 

A price to pay

The kingdom’s shareholders, Aramco’s main recipient of those dividends, are on the receiving end of a major squeeze on public finances.

Aramco could not keep its end of the bargain without resorting to some dealing and wheeling.

Recently, it held off on a deal to build a $10 billion refining and petrochemicals complex in China.

This comes as Aramco plans deep cuts to its capital spending amid low crude prices and rising debt. 

Bloomberg reports that Aramco plans to cut capital expenditure (CAPEX) to $25 billion or less next year, quoting Nasser after the giant oil company announced second-quarter results. He said 2021 CAPEX would be “significantly” lower than the company’s official guidance of $40 billion to $45 billion.