What a difference a year makes. In December 2019, Saudi Arabia nodded in approval of its crude oil powerhouse Saudi Aramco to file for an initial public offering (IPO). It whetted the appetite of dividend-hungry investors, sparked headlines all over the world, and shattered records. The Kingdom heralded the decision as a landmark move that would shower Riyadh with an ocean of riyal. But while it was meant to generate billions in new revenue for the country, it turns out that it may be costing the Kingdom billions. Even if oil makes a full recovery, Saudi Aramco’s balance sheet will be covered in red ink.
A Kingdom of Debt
In recent months, Saudi Aramco has been drilling barrels of debt through the bond market to cover its quarterly dividend cost. Its handsome payment – $18.75 billion every three months – was the nubile selling point for Saudi investors. Under today’s conditions, the nine cents paid to traders may be unsustainable.
Crude prices have recovered to an eight-month high, but they did crash as much as 60% at one point. This imbibed 50% of the company’s net profits in the third quarter of 2020, falling below $12 billion. This entire quarterly profit was not enough to cover the Q3 dividends. The only way to guarantee its annual $75 billion dividend payment moving forward is through a series of budget cuts and a rise in oil prices.
Aramco has been making some adjustments to annual capital spending, such as suspending the $20 billion crude-to-chemicals plant in the nation’s Red Sea and postponing its $10 billion expansion plans into mainland China. It is also being reported that its headline-grabbing 25% stake in Sempra Energy’s liquefied natural gas (LNG) terminal in Texas might not occur.
Until global crude markets return to some semblance of normalcy, Aramco will be required to continue taking on more debt to survive. The company’s latest endeavor involves raising about $8 billion from a five-part deal, down from the $12 billion in the debut bond sale earlier this year.
Could Saudi Aramco find ways to attract Western investors? It might need to open the stock up to appeal to outside traders to plug the holes on its sinking ship. That said, institutional groups on Wall Street failed to raid Riyadh with the little opening during the IPO last winter. OilPrice.com summarized the IPO situation at the time, referring to the toxicity of the company’s debut:
” … the company’s IPO was so toxic on so many levels that it was shunned by Western investors and had to be off-loaded to buyers who were either bullied or bribed into buying the stock. Aramco is left having to pay massive guaranteed dividend payments for the foreseeable future to those shareholders.”
2020 Has Been Crude to Crude
It has been quite the year for crude oil. What started as a promising period for the energy sector quickly metastasized into the worst performance on record, with prices cratering to negative territory for the first time in history. This hurt the newly energy-independent United States, but the historic event decimated OPEC and its allies, OPEC+, even more. Oil prices have stabilized and are trading at relatively profitable levels for U.S. oil and gas producers, despite global demand failing to return to pre-pandemic levels. The industry is bouncing back, and 2021 looks hopeful for the energy industry. But it may not be so heavenly in the Kingdom as the nation faces a myriad of problems at Saudi Aramco.
Yield-starved investors in the Middle East may need to go hungry again.
Read more from Andrew Moran.