Oil giant Saudi Aramco low on cash as it gets set to pay world’s biggest dividend

Saudi Aramco returned to the debt markets for the first time since April of last year, selling $US8 billion ($11 billion) of bonds to help fund the world’s biggest dividend.

The state oil and gas firm issued the debt on Tuesday (Saudi Arabia time) after slumping crude prices caused profit to fall by 45 per cent in the third quarter. That’s left it unable to generate enough cash to fund shareholder payouts it’s promised will reach $US75 billion this year. Almost all of those will go to the Saudi Arabian government, which needs the money to plug a widening budget deficit and prop up a slumping economy.

Slumping oil prices have left Saudi Aramco  unable to generate enough cash to fund shareholder payouts it's promised will reach $US75 billion.this year.
Slumping oil prices have left Saudi Aramco unable to generate enough cash to fund shareholder payouts it’s promised will reach $US75 billion.this year.Credit:AP

Aramco’s deal was the largest from a company in emerging markets this year, according to data compiled by Bloomberg. The firm sold tranches maturing in three, five, 10, 30 and 50 years. Investors placed more than $US50 billion of orders, according to people with knowledge of the matter. Pricing ranged from 1.32 per cent for the shortest notes to 3.65 per cent for the 50-year portion. The spreads over US Treasures were between 110 basis points and roughly 200.

Benchmark Brent oil has dropped almost 35 per cent this year to around $US44 a barrel, with the coronavirus pandemic and lockdowns sapping demand for energy. Still, yields in the developed world are so low that investors have rushed to buy highly rated emerging-market assets, including those of Aramco, the world’s biggest oil company. The yield on the firm’s $US3 billion of bonds due in 2029 has dropped to 2.11 per cent from 3.04 per cent at the start of 2020. That’s only slightly higher than the rates on the Saudi government’s equivalent bonds.


Tuesday’s deal was also helped by the more bullish sentiment among investors following this month’s progress on coronavirus vaccines. And while some bond traders are wary that U.S. President-elect Joe Biden might regulate oil and gas companies more, Aramco benefits from having such low production costs, according to Todd Schubert, head of fixed-income research at Bank of Singapore.

The Dhahran-based company, rated A1 by Moody’s Investors Service, has slashed spending, cut jobs, and is considering selling some assets as it looks to save money for its shareholder payouts. Despite these efforts, its gearing – a measure of debt as a percentage of equity – has increased to 21.8 per cent, above its target range of 5 per cent to 15 per cent. Debt also rose because the company took on loans to pay for a $US69 billion acquisition of Saudi Basic Industries, a chemical maker, earlier this year.

Aramco listed shares on the Saudi stock exchange last December. It said it would pay an annual dividend of $US75 billion for at least five years after the initial public offering. It may need to tap the bond market again, given the size of those commitments, according to Bloomberg Intelligence.

The dividend pledge has helped prop up Aramco’s shares. They’ve risen 0.7 per cent this year, while those of rivals such as BP Plc and Royal Dutch Shell have fallen more than 40 per cent.

Still, Saudi Arabia’s reliance on Aramco to support its fiscal needs will weigh on the company’s balance sheet and “risks placing increasing stress on its credit profile,” said Jaimin Patel, a BI analyst.

The lead banks on Tuesday’s bond sale were Citigroup, Goldman Sachs, HSBC Holdings, JPMorgan Chase & Co, Morgan Stanley and NCB Capital.

Aramco raised $US12 billion in its debut Eurobond sale last year and attracted around $US100 billion of orders.


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Source: Thanks smh.com