Saudi Aramco, the world’s most valuable listed company, will pay a dividend of $18.75 billion for the first three months of 2020. That would leave it on track to meet its full-year goal of $75 billion, though it didn’t specify if it was still committed to that number.
The payout is crucial for the kingdom, which holds about 98% of Aramco and is facing its worst financial turmoil in decades as revenue falls. On Monday, the government tripled value-added tax and cut bureaucrats’ allowances as it looks to rein in a fiscal deficit that could reach 13% of gross domestic product this year.
At the time of Aramco’s record initial public offering in December, the dividend was a huge part of its appeal. A stress test carried out by JPMorgan Chase & Co. showed that if oil fell to $40 a barrel and production was 9 million barrels a day, Aramco would only remain within its self-imposed borrowing target if it cut the dividend by 30% and slashed spending dramatically.
Arab Light crude, one of the nation’s main grades, plunged to as little as $13.34 a barrel last month as an OPEC+ agreement to curb supply fell apart and Saudi Arabia ramped up production. The kingdom has now changed tack and pledged to reduce output to an 18-year-low of 7.5 million barrels a day in June.
The war over market share started just as the first quarter was ending, and the impact of low prices will probably be more pronounced in the second quarter. It was in April that benchmark prices turned negative in the U.S. for the first time.
“Clearly, Aramco’s financial metrics will deteriorate significantly in the second quarter, like its peers," said Biraj Borkhataria and Erwan Keroureda, energy analysts at Royal Bank of Canada.
Big Oil’s generous payouts have long been a key attraction for shareholders, but now they are threatened. Exxon Mobil Corp. last month froze its dividend for the first time in 13 years while slashing capital expenditure, and Royal Dutch Shell Plc cut payouts for the first time since the Second World War.
Aramco’s first quarter free cashflow came in at $15 billion, less than the dividend for the period.
“Effectively, Aramco would be borrowing to pay its dividend, which cannot be sustainable in the long term," said analysts at AllianceBernstein including Neil Beveridge and Oswald Clint.
“We retain significant flexibility to adjust expenditures and have considerable experience in managing the business through times of adversity," Aramco’s Chief Executive Officer Amin Nasser said. “This resilience will enable us to continue delivering on our commitments to our shareholders."
Aramco’s income declined 25% year-on-year to 62.48 billion riyals ($16.6 billion) between January and March, less than the consensus forecast of around $17.5 billion. Refining swung to a loss before earnings and tax are included, while production operations earned almost $38 billion. Aramco continues to forecast between $25 billion and $30 billion of capital spending this year but expenditure for 2021 is under review, it said.
It could generate about $133 billion for the government in 2020 across royalties, taxes and dividends, according to Credit Suisse Group AG. That’s “a far cry from what it had expected originally and insufficient to cover the original government budget," analyst Thomas Adolff said in a research note.
Saudi Arabia needs an oil price of $76 a barrel to balance its budget this year, according to the International Monetary Fund. But efforts to contain the coronavirus pandemic by shuttering swaths of the world economy have seen Brent crude more than halve since the end of 2019 to $30.33 a barrel.
Aramco has already decreased spending to protect shareholder payouts. The Dhahran-based company said in March that it would limit capital expenditure to $30 billion in 2020, down from previous plans to spend as much as $40 billion.
As well as the dividend, major spending commitments include the first installment for a $69 billion acquisition of a stake in Saudi Basic Industries Corp. Aramco is buying 70% of the chemicals maker from the kingdom’s sovereign wealth fund.
The takeover’s on track to close by the end of June, according to a spokesperson.
“Looking ahead to the remainder of 2020, we expect the impact of the Covid-19 pandemic on global energy demand and oil prices to weigh on our earnings," Nasser, the chief executive, said. “We continue to reinforce the business during this period by reducing our capex and driving operational excellence. Longer term we remain confident that demand for energy will rebound as global economies recover."
Aramco’s stock rose 1.3% to 31.30 riyals by 1:53 p.m. in Riyadh. It is down 11% this year, compared with Brent’s 54% drop. The company’s market value has declined from a peak of over $2 trillion to $1.6 trillion, still $200 billion more than that of Microsoft Corp., the second-biggest firm globally.