Aramco may cut govt payout as drop in oil prices hits first-quarter profits

Saudi oil giant Aramco may cut its dividend to the Saudi government, but is likely to maintain payouts to minority shareholders as a plunge in crude prices shrinks first-quarter profits, analysts said.

Saudi Arabian Oil Co., as the company is formally known, pledged an annual dividend of $75 billion for the first five years to attract investors to its initial public offering in December last year.

Since then, global movement restrictions to contain the novel coronavirus have destroyed fuel demand and the oil market has been rocked by the impact of surplus supplies, as Riyadh and Moscow in April pumped flat out in a battle for market share.

When it reports its first-quarter results on Tuesday analysts expect Aramco to report lower earnings and a decrease in cash flows. Some also predict a cut in payments to the Saudi government, possibly by half.

That would add to the economic burdens on Saudi Arabia from the oil market crash. 

"We are forecasting a cut of 50% in dividends to the government due to the lower oil prices and production," Yousef Husseini, equity analyst at EFG-Hermes, said.

By contrast, the 1.7% of shareholders who bought into last year's stock market listing are likely to see their dividend protected as Aramco, in common with other giant oil companies, seeks to retain shareholders made nervous by the twin shocks of the coronavirus crisis and the climate crisis.

Aramco paid a dividend of $73.2 billion in 2019 and has said it plans to declare a cash dividend of $75 billion in 2020, of which 1.7% will go to minority shareholders. Analysts expect the 1.7% portion - which amounts to $1.3 billion - to be untouched.

ExxonMobil, BP and Chevron have maintained their quarterly payouts, but Royal Dutch Shell cut its dividend for the first time since World War II to conserve cash.

SABIC ADDS TO PRESSURE

Another pressure on Aramco is a deal to buy a 70% stake in petrochemicals maker SABIC.

Reuters reported on Sunday the company was seeking to cut the cost of the $69 billion acquisition, according to two sources. It needs to pay $25 billion this year to the kingdom's sovereign wealth fund, according to the payment terms.

"I expect they will be able to cover most of this with debt financing - as per the original plan - and any balance can easily be covered with cash," Husseini said. Aramco had $60 billion in cash as of end 2019 and about $7 billion debt is expected in 2020.

Global benchmark Brent crude dropped some 65% in the first three months of the year, before OPEC+ agreed to cut oil supply by a record 9.7 million barrel per day from May 1 to offset the virus impact on demand and shore up prices.

Aramco had a negative gearing of minus 0.2% at the end of 2019, but given the new realities, Aramco will probably need to borrow this year and could see its gearing - net debt divided by balance sheet capital - climb nearer to the levels of other oil majors, analysts said. They did not give any Aramco debt forecast.

A mean estimate by analysts at Egyptian investment bank EFG-Hermes, Saudi Arabia's Al Rajhi Capital and Dubai-based Arqaam Capital forecast Aramco would report net income of $17.8 billion for the quarter, compared with $20 billion in the fourth quarter of last year.

They also expect revenues of $63.8 billion in the first quarter, compared with $85 billion in the fourth quarter.

"Aramco is now facing the same challenge as any other big oil player, striking the right balance between capex (capital expenditure), dividends and debt load," Dmitry Marinchenko, senior director at Fitch Ratings, said.