Forget other models. Aramco should carry on being ... Aramco
The big debate in the world of corporate energy is whether or not Saudi Aramco will be able to pay the $75 billion (SR281 billion) dividend it pledged at the time of the initial public offering (IPO) last year.
According to various commentators, the Saudi oil giant will not have sufficient financial resources to meet the big dividend commitment, or at least not without substantial borrowing on the international debt markets.
These gloomy pundits say that Aramco should be more like other oil companies that have cut their dividends to suit the straitened conditions of the current oil market. Europeans such as Shell and BP cut dividend payments for the first half of 2020, though Americans like Exxon Mobil and Chevron maintained dividends.
It is clear that Aramco sees the big US companies as more of a peer group than the Europeans. Not only did it reiterate the $75 billion pledge at the time of recent results, it is also fully committed, as the American groups are, to a future as an oil and energy producer, rather than embarking on some post-oil future the Europeans see as the way forward.
This is not to say Aramco does not believe in the energy transition; rather that it believes oil and gas will continue to be vital factors of the energy equation for decades to come. Surely that is right.
But back to the dividend. At the recent half-year results presentation, Aramco CEO Amin Nasser reiterated his determination to stick with the $75 billion, pointing out that the portion of that payment due to investors in the IPO was “ring fenced” at the time of the flotation.
What got the pundits speculating was that, on the face of it, this payment would be “uncovered” this year. With crude prices low (though slowly recovering), financial conditions in the oil business are the toughest many can remember.
In these circumstances, Aramco would not have enough cash to pay the dividend without borrowing more money to do so, the argument went.
It is a valid debate, but one that does not really stand up to scrutiny, for several reasons. First, although Aramco profits were substantially down in the first half, it was the only one of the oil majors to actually turn a profit, thanks to commanding market share and low cost of production.
The second reason the Aramco dividend looks safe was highlighted by Christyan Malek, one of the best analysts in the business, at J.P. Morgan. The dividend pledge was entirely appropriate and made Aramco shares an “overweight” item in the JPM portfolio, he said.
Although Aramco profits were substantially down in the first half, it was the only one of the oil majors to actually turn a profit, thanks to commanding market share and low cost of production.
Aramco capacity to pay the dividend rests on its low production costs and consequent huge cash flow. As other oil companies either slash investment in new production or withdraw into a post-petroleum world, Aramco will be able to further benefit from those advantages, “leaving Aramco in pole position to take a higher share of demand growth.”
If, as JPM believes, we are heading into a “supercycle” of oil-price rises in 2022, Aramco will take full advantage of any spike in prices.
Aramco could also, Malek noted, reduce its own capital expenditure further. It has said its outlay for next year will be at the lower end of a range already reduced from a top figure of $30 billion, which many in the market are taking to mean it would be about $20 billion.
The other reason the Aramco dividend is safe is that, as many commentators have said, it has huge firepower in international capital markets to raise debt to cover any temporary shortfall. Triple-A rated and with an impressive track record in bond markets on last year’s historic issue, any Aramco issue will be highly ttractive to bond investors.
Sure, borrowing levels have increased because of the SABIC acquisition, but they are still very low by international standards, providing plenty of wriggle room in international financial markets.
For all these reasons, it does not make much sense to say that Aramco should be “more like Exxon or Shell.” Such a unique company in so many ways, it really just has to carry on being Aramco.
• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai