Aramco’s key decision this week on its dividend — the world’s largest — is set to have major implications for Saudi Arabia’s weakening finances.
Saudi Aramco is scheduled to announce on Tuesday how it will change its $124 billion annual payout to shareholders. It could continue some elevated payments and let its balance sheet take the increasing pain, or cut the distribution and risk widening the Saudi budget deficit.
What the company does would also have an impact of debt issuances by the kingdom, whose nearly $15 billion in bond sales this year make it the biggest borrower in emerging markets.
Aramco’s crude sales and generous payments are key elements in Crown Prince Mohammed bin Salman’s multitrillion-dollar economic transformation plan. But the level of the distribution has outstripped the company’s earnings, putting increasing stress on the balance sheet and flipping into a net debt position from over $27 billion in net cash just over a year ago.
Analysts and Saudi economy-watchers are watching closely.
“Dividends from Aramco are a major source of revenue, funding various government projects and initiatives,” said Samsara Wang, a sovereign debt analyst at Pinebridge Investments. While additional Aramco dividends can help relieve funding pressure, Wang said that the government is also likely to sell another $5 billion to $6 billion in bonds this year.
Aramco’s dividend is made up of two parts: a base payment of $20.3 billion a quarter that has used up about 95% of free cash flow in the first three quarters of 2024, and a performance-linked portion pegged at $10.8 billion for each three-month period.
Starting in 2025, the company plans to start paying the special component, initially based on the huge profits from oil’s boom following Russia’s invasion of Ukraine, as a portion of free cash flow after covering the base dividend and any investments. With analysts forecasting cash in 2025 at less than the base dividend, that leaves little scope for an additional payout.
Aramco’s been clear that the base dividend will remain in place and is set to gradually increase over time. Analysts have speculated that the company could borrow more for the distribution or tweak its dividend policy.
To be sure, 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. Rising debt isn’t necessarily a bad thing, given its low leverage, Aramco’s Chief Financial Officer Ziad Al-Murshed has said. The company plans to sell more debt after a $9 billion in dollar and Islamic issuances last year, he said in an interview in November.
Still, a weak outlook for oil means Aramco would need to be careful not to put too much stress on the balance sheet. OPEC+ delegates said last month that Saudi Arabia and others in the alliance may again delay increasing production from April amid concerns over economic growth. Crude in London fell to the lowest level this year last week.
Aramco’s net income has declined year-on-year for seven consecutive quarters, and analysts are forecasting another drop in the fourth quarter. The company’s shares have also suffered, declining about 3% this year, and lagging behind the so-called oil supermajors that includes Exxon Mobil Corp. and Shell Plc.
