(Bloomberg) – The world’s largest oil company is being crushed through its largest shareholder, the Saudi government.
Even with crude falling to $ 40 a barrel this week and its money dwindling, Saudi Aramco is looking to pay a $ 75 billion dividend this year, mostly to the state. Concerns are growing, and among global fund managers who bought the company in a record IPO last December, it is added that Aramco is suspending strategic projects and going into debt too quickly.
Aramco has been the country’s money cow for decades. But the stress it faces was further eased through the coronavirus-induced collapse in energy demand (Brent fell another 5% on Tuesday) and now that it is an indexed company with shareholders from New York to Tokyo.
Crown Prince Mohammed bin Salman, the de facto ruler of the 35s, has vowed to diversify the oil kingdom and spend billions to expand everything from futuristic cities to tourist and monetary services. So you want the money from Aramco.
Portraits of Mohammed bin Salman and King Salman are on display in a structure in the King Abdullah money district in Riyadh.
“The crown prince essentially said that the company was a piggy bank that he could use to finance his other projects,” said Jean-François Seznec, senior fellow at the Atlantic Council at the Global Energy Center in Washington and a specialist in the Middle East. . -This. “It will restrict how much they can invest in things like maintaining the oil fields and developing new technologies.
Dividend promise
In the past, the government has used Aramco’s balance sheet to bolster its own finances. But that hasn’t been the case for at least 20 years, according to a banker who has worked for the company since the 1990s.
Fitch Ratings Ltd. estimates that the Saudi budget deficit will hit 15% of gross domestic product in 2020, one of the grades in the Middle East. Government revenue fell nearly 50% year-on-year this quarter.
Aramco has committed to paying investors $ 75 billion a year for five years after the IPO. Eager for a foreign budget and a world record price of $ 2 trillion, the government even said last year that it could simply forfeit its own percentage of the dividend and leave it to others if oil costs were falling.
Instead, the ax falls elsewhere. Aramco slashed capex by tens of billions of dollars, laid off many foreign workers, and reorganized its control as part of a plan to sell some assets.
It paid a $ 37. 5 billion dividend in the first six months of 2020, even as rivals Royal Dutch Shell Plc, BP Plc, and Eni SpA cut theirs. The bills were nearly double Aramco’s cash flow, or $ 21 billion.
Expensive dividend
Dividfinishs, and the $ 69 billion takeover of chemical maker Sabic from the Saudi sovereign wealth fund, have inflated the company’s debt levels, still below the maximum of the giant corporations. Petroleum. The debt-to-equity ratio fell from -5% at the end of March, meaning that Aramco had more money than debt, to 20% in June, above its target diversity of 5% to 15%.
According to David Havens, Head of Energy Equity Studies at SMBC Nikko Securities America, the leverage rate can be successful by 30% through 2023 if crude costs stay below $ 60 a barrel and Aramco does not reduce the dividend. .
The market doubts that oil will succeed at this point anytime soon. Brent will earn an average of just $ 47. 50 next year and $ 53 in 2022, according to median forecasts from analysts surveyed via Bloomberg.
Aramco “has the lowest upstream prices of any primary power company,” a spokesperson said in a statement. “This provides a point of flexibility in our capex plans in this recession, which supports our ability to maintain dividends. “
The Saudi government’s Center for International Communication, which responds to requests from foreign media, responded to requests for comment.
Ice Projects
Executives have shelved several primary projects in recent months, adding a $ 20 billion facility in the Red Sea to convert crude into chemicals and a liquefied herb fuel export terminal in Texas. A $ 10 billion refinery in China was also suspended, Bloomberg reported, Aramco has said that we are still determined to invest in the world’s second-largest economy.
Aramco had developed those plans to earn more from its crude oil and face the global energy transition to cleaner fuels like gas.
According to Allen Good, an analyst at Morningstar Inc.
Outperform your rivals
Aramco has weathered the oil crisis more than its peers so far. Its second-quarter profit of $ 6. 6 billion is likely to have fallen 73% from the prior year, yet it is the highest of any power company. BP lost $ 6. 7 billion and Exxon Mobil Corp. lost $ 1. 1 billion.
The percentage value of the Saudi company has gained 1% in Riyadh this year, largely due to the promise of dividends. Shell fell 53% and BP 43%.
However, the Crown Prince’s preference to withdraw cash from Aramco can only increase. Since President Yasir Al-Rumayyan said earlier this year that he was looking to sell some assets, the economy has deteriorated. The government has been forced to raise taxes and cut civil servants’ allowances.
Aramco is already making plans to sell a stake in its pipelines to raise about $ 10 billion, Bloomberg reported in April.
Prince Mohammed and the government “really want Aramco to triumph in the kingdom over Covid-19 and enter a post-oil era,” said Neil Quilliam, director of Azure Strategy, a consultancy focused on the Middle East. “By doing so, they will likely hurt the country’s successful businesses the most. “
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