Aramco's Dividend Discipline Isn't Enough -- Heard on the Street
By Rochelle Toplensky
Oil industry investors have been rocked by two jarring dividend
cuts this year, but the biggest oil company of them all has stayed
the course. That discipline will do little to attract foreigners to
Saudi Aramco, though.
It was a brutal second quarter for the entire oil sector:
Profits were hit hard by Covid-19 lockdowns exacerbating an
ill-timed price war. Saudi Arabian Oil Company had it worse than
most because it also was a major contributor to massive output cuts
that helped to stabilize the price of crude in the past few months.
The company nevertheless confirmed it would pay $18.75 billion in
dividends for the quarter. That isn't a great surprise given its
majority shareholder -- the Kingdom of Saudi Arabia -- needs the
cash and it is the one calling the shots at the company. Global
investors avoided the company's December initial public offering on
worries of political interference and an expensive share price.
Both concerns remain.
On Sunday Aramco reported tough second-quarter results. Net
income of $6.6 billion was in line with expectations, but cash flow
disappointed and debt rose. A closely watched industry metric, net
debt as a percentage of total capital, jumped to 20.1% from net
cash of 4.9% last quarter. The company's target range is net debt
of 5% to 15%. One reason for the jump is that Aramco started to
consolidate the borrowings of Sabic, the chemical company it bought
from the Saudi sovereign-wealth fund in June.
Privately owned supermajors BP and Royal Dutch Shell both
recently cut their payouts. However, luckily for minority investors
in Aramco, dividends are one area where the kingdom's interests
align with theirs. Over 98% of the dividends being paid go to
Sometimes the state's interests trump the company's, though.
Aramco agreed in March 2019 to buy 75% of Sabic from the kingdom's
sovereign-wealth fund for $69 billion to diversify its downstream
business. Sabic's market value plunged earlier this year, but
efforts to renegotiate the purchase price yielded only deferred
Another example of misaligned incentives that hit the company's
bottom line was Riyadh's ill-timed price war with Moscow in March.
Aramco was ordered to open the taps and ramped up to produce 12.1
million barrels of oil on April 2, its highest ever daily total.
Just days later, futures prices briefly fell below zero in the U.S.
as the country ran out of places to store oil. Eventually, Saudi
officials were major contributors to the successful effort by the
Organization of the Petroleum Exporting Countries and its nonmember
allies to stabilize crude prices closer to $40 a barrel. It was
painful for Aramco -- its average oil production fell from 9.8
million barrels a day in the first quarter to 9.3 million in the
second -- and there are no guarantees this cooperation will
Despite the tough quarter, Aramco's shares have outperformed
those of their rivals, down about 6% year to date. By contrast,
Shell's value has nearly halved and other rivals are down around a
third or more. Aramco is an efficient, low-cost producer but its
strong share performance is less about confidence and more about
its investor base, who are primarily locals. Shares traded broadly
flat on Monday at 33.10 riyals, still well above the 24 riyals that
international investors said they would be willing to pay -- and
that was before the pandemic hit.
Dividend discipline isn't likely to lure international investors
now. It is possible that mounting financial pressure could force
the kingdom to sell more Aramco shares in the future to nonlocal
buyers, but doing so will require either a dramatic recovery in the
price of oil or a lower asking price for shares.
Write to Rochelle Toplensky at email@example.com
(END) Dow Jones Newswires
August 10, 2020 11:24 ET (15:24 GMT)
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