Saudi Aramco stuck by plans to pay out $75bn in dividends this year despite a 73 per cent drop in second-quarter earnings, as the coronavirus pandemic wreaked havoc on the finances of the kingdom’s state energy group.
In the three months to June 30, the company reported net income of $6.6bn compared to $24.7bn in the same period a year ago, as government lockdowns to curb the spread of the virus dramatically hit oil demand and prices.
“Strong headwinds from reduced demand and lower oil prices are reflected in our second-quarter results,” said Amin Nasser, chief executive.
Saudi Aramco, which was beaten recently by Apple as the world’s most valuable listed company, also noted “declining refining and chemicals margins”.
Despite a push by Crown Prince Mohammed bin Salman to diversify its economy, oil sales still provide the bulk of the kingdom’s revenues, meaning the resource-rich country is beholden to the crude price.
Brent crude fell from almost $70 a barrel in early January to less than $20 in April as consumption declined as much as a third at the peak of shutdowns. It has only recovered to around $44.
Yet Saudi Aramco maintained the world’s biggest quarterly dividend at $18.75bn, which will largely go to the government in Riyadh, in line with its annual $75bn dividend pledge. The shareholder payout is far greater than free cash flow for the period of $6.1bn, which is down from $20.6bn a year ago, meaning the company will probably have to borrow to cover it.
The company’s gearing ratio — a measure of financial leverage — 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 exceeds the company’s longer-term target of 5-15 per cent.
The company, which said in March it would cut capital spending to $25bn-$30bn this year from $33bn in 2019, gave further guidance and said it would likely be at the “lower end” of the range.
Mr Nasser added that moves by governments to ease lockdown restrictions and measures to reboot economies had meant the company was seeing a “partial recovery” in the energy market.
Saudi Aramco also has to take 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.
The pandemic and resulting oil market turmoil has created a dual economic crisis for the kingdom. Saudi Arabia has trebled value added tax, increased import tariffs and cancelled some benefits for government employees to try and bolster its finances.
Saudi Aramco’s shares have fallen about 7 per cent this year to around 33 SAR ($8.79), although this is still higher than the 32 SAR price at its December 2019 stock market debut.