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Breakingviews - Aramco’s dividend defences are triple-locked

A view shows branded oil tanks at Saudi Aramco oil facility in Abqaiq, Saudi Arabia October 12, 2019.

LONDON (Reuters Breakingviews) - Saudi Aramco has deployed its triple-bottomed dividend defences sooner than expected. The Saudi state energy giant is handing $18.75 billion to investors this quarter even though earnings plunged to little more than a third of that amount. It’s a contrast with rivals BP and Royal Dutch Shell, which both trimmed their payouts. But even if crude demand plunges again, the $1.8 trillion firm has multiple ways of ensuring rewards for shareholders.

Given that the price of West Texas Intermediate crude briefly turned negative in April, Aramco’s net income of $6.6 billion in the three months to June is a testament to its efficiency. On average, each barrel of oil cost it just $7.5 to produce, including $4.7 per unit of capital spending. Even at an average price of just $23, Aramco remains comfortably in the black.

A gradual recovery in crude prices is Aramco boss Amin Nasser’s first wish. The black stuff is now trading at $44 a barrel, and with gasoline and diesel demand in China almost back at pre-crisis levels, Goldman Sachs analysts reckon it might finish the year as high as $63.

Even if prices remain subdued, however, Nasser has scope to ride out the storm. With just $6.1 billion of free cash flow in the quarter, Aramco will effectively borrow nearly $13 billion to fund its payout. After this year’s takeover of petrochemicals group Saudi Basic Industries, net debt has jumped to $286 billion. But that’s still only a fifth of total funding, compared with 36% for BP. To hit a similar ratio, Aramco would have to fund its $75 billion annual dividend entirely out of debt three years in a row.

Public investors who bought 1.5% of Aramco’s shares last year have one more line of defence. The company has promised to pay their dividend, which costs $1.1 billion a year, ahead of its main shareholder, the Saudi government. Cutting its contribution to state coffers would doubtless cause conniptions in Riyadh but keep Aramco’s capital markets reputation intact. Little wonder Aramco shares are down just 6% this year, against BP’s 35% decline. For thick-skinned investors, that’s a fitting reward for turning a blind eye to Saudi’s abysmal human rights record or Aramco’s impact on the climate.

Breakingviews

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