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Aramco may slash dividend payment to boost Saudi economic growth plan

Highlights

Dividend payments have weighed on Aramco's capex budget

Economic plan draws skepticism from analysts

Change of direction since results call in March

Dubai — Saudi Aramco may cut dividend payments to the government, pledged as part of its IPO strategy in December 2019, following an announcement from the country's leadership that companies must reduce shareholder payments and funnel money into the local economy instead.

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"The payment of dividends is a Board decision, based on a range of market and company factors and is reviewed on a quarterly basis," Aramco told S&P Global Platts in an email.

"As HRH The Crown Price said in his announcement, the dividend for minority shareholders, under the five-year IPO plan, will be unaffected. Aramco remains committed to ensuring free cash flow to support dividend distributions through various market conditions and crude oil price cycles," the company added.

Aramco did not provide a response to a question by Platts on whether the plans would impact the company's capital expenditure going forward.

Saudi Arabia's de facto leader Crown Prince Mohammed bin Salman said on March 30 that 24 Saudi listed companies, including Aramco and Saudi Basic Industries Corp, or SABIC, and National Shipping Co. will reduce their dividend payouts to the government and redirect the money into the local economy. The plan targets the contribution of $1.33 trillion of domestic capital from the companies over the next ten years.

It was not clear when this decision was made. However, in Aramco's 2020 financial results presentation on March 20, CEO Amin Nasser stated the company intends to pay $75 billion in 2021.

The Saudi economy is floundering, with woes further compounded by the demand destruction caused by the pandemic, seeing its budget deficit widen to about $79 billion in 2020. Some 40% of the Kingdom's GDP is derived from oil revenues generated by Aramco, according to data from the country's finance ministry.

As part of its pitch to investors during the 2019 IPO, Aramco pledged to issue a $75 billion dividend annually for five years. The Saudi government, which owns 98.5% of the company, is the primary benefactor of this payment. Therefore, the new scheme will see Aramco funds diverted away from the government's budget.

The burden of the $75 billion dividend plus the weak oil price environment due to the pandemic weighs heavy on the company's operations. This has meant it has had to delay payments to its contractors by several months, Platts reported in January.

Additionally, the company was forced to slash its 2020 capex budget in half, to around $25 billion. For 2021, its capex will be an estimated $35 billion, below previous guidance of $40 billion to $45 billion, Aramco said in March.

Salman's announcement drew skepticism from analysts on whether it will provide an economic boost to the country.

"While this may drive diversification efforts, there is a risk that it leads to a misallocation of resources and damages economic growth in the long run," said Capital Economics, a UK-based consultancy.

"We're not convinced that these measures will significantly lift the Kingdom's long-term outlook. Of the local private sector companies enlisted to be part of the plan, many of them are at least part-owned by the PIF [the Public Investment Fund, which is the country's sovereign wealth fund]. As a result, the program is, de facto, a state-led investment drive," the consultancy added.