Saudi Aramco stuck by plans to pay out $75bn in dividends this year despite a 73 per cent drop in second-quarter earnings and surging debt levels, as the state energy group bets on a rebound for the pandemic-hit oil sector.
Like its international peers, Saudi Aramco has had a brutal year. Government imposed lockdowns to curb the spread of coronavirus dramatically hit oil demand and prices, leading to a fall in net income of $6.6bn in the three months to June 30, compared with $24.7bn in the same period a year ago.
It marks a drastic change in fortunes from December, when it raised a record $25.6bn in its initial public offering and became the world’s most valuable listed company — a status it recently lost to technology giant Apple.
“Covid-19 brought the world to a near standstill,” Amin Nasser, chief executive, told reporters on Sunday.
But the easing of restrictions and measures to reboot economies meant the company was seeing a “partial recovery” in the energy market. “The worst is likely behind us,” Mr Nasser said.
Brent crude, the international oil benchmark, fell from almost $70 a barrel in early January to under $20 in April as consumption declined by as much as a third at the peak of shutdowns. It has recovered to about $44.
“Look at China, their gasoline and diesel demand is almost at pre-Covid-19 levels. We are seeing that Asia is picking up and other markets [as well],” Mr Nasser added.
While some of the world’s biggest oil companies have also noted a resurgence in demand, many are making large cuts to costs and capital spending and are wary about repeated lockdowns in the months ahead that could hinder consumption.
Despite the uncertainty surrounding the global economy, Saudi Aramco maintained the world’s biggest quarterly dividend at $18.75bn, mostly intended for the government in Riyadh, in line with its pledge for an annual $75bn payout. The shareholder handout is far greater than free cash flow for the period of $6.1bn, which is down from $20.6bn a year ago.
Mr Nasser told reporters that “our intention is to pay $75bn, subject to board approval and depending on market conditions”. Minority shareholders, which own 1.5 per cent of the company, will be “protected” for the next five years and given priority payments, he said.
In June, Mr Nasser said that while the company would try to use cash to make dividend payments, it could also issue loans or bonds.
The company’s gearing ratio — a measure of financial leverage — has already jumped to 20.1 per cent, from minus 4.9 per cent in the previous quarter. Saudi Aramco said this was related to the June acquisition of a majority stake in chemicals company Sabic from the Public Investment Fund, Saudi Arabia’s sovereign wealth fund, for $69bn.
Saudi Aramco had expected the gearing to go up because of the deal, but the level far exceeded the company’s longer-term target of 5 per cent to 15 per cent.
The government has already been forced to raise the kingdom’s debt ceiling from 30 per cent of gross domestic product to 50 per cent, and Riyadh has borrowed more than $20bn on local and international markets this year.
Mohammed al-Jadaan, the finance minister, said last month that the kingdom, which posted a budget deficit of $29bn in the second quarter, was likely to tap the international debt market at least once more before the end of year.
While Crown Prince Mohammed bin Salman has sought to diversify Saudi Arabia’s economy, oil sales still provide the bulk of the kingdom’s revenues. The IMF has forecast that the economy will contract by 6.8 per cent this year.
Saudi Aramco takes orders from Riyadh on oil production policy. In April, output rose to a record 12.1m barrels a day as the kingdom engaged in a price war against rival producers. Production then fell to 7.5m b/d in June as part of cuts enacted by Opec and allies including Russia to bring the market into balance.
Saudi Aramco’s shares have fallen about 7 per cent this year to about SR33, although this is still just higher than the SR32 price at its stock market debut, which was the world’s largest IPO.