(Bloomberg) -- Saudi Arabian Oil Co. plans to take on more debt and will focus on “value and growth” for its dividend over the long term, the company’s finance chief said.
Distributions by the state-owned company are a key element of the kingdom’s finances, which have wobbled this year as Crown Prince Mohammed Bin Salman pushes his ambitious economic transformation plan. The company has strained its balance sheet in 2024, flipping to a net-debt position for the first time in two years, as it pays out a massive dividend.
While Aramco has pledged that its market-leading base dividend serves as a floor, earnings forecasts by analysts, indicate that Aramco won’t be able to maintain the same level of its performance-linked component as this year.
The state-owned oil producer is a vital component of the Saudi economy, with its crude sales and generous payouts helping fund Crown Prince Mohammed Bin Salman’s multitrillion-dollar spending plans. However, it’s been hit by a slump in crude prices this year, while its oil production is near the lowest level in three years.
“You’ll see us do a couple of things. One is just take on more debt compared to use of equity,” Chief Financial Officer Ziad Al-Murshed said in an interview in Boston. “It’s nothing to do with the dividend, it is optimizing our capital structure so that we end up with a lower weighted average cost of capital.”
Aramco tapped debt investors earlier this year when it sold $6 billion of dollar-denominated bonds in June, followed by about $3 billion of Islamic dollar notes in September. The company had been absent from the debt markets since 2021. “We had the luxury of sitting out those three years until the market became conducive,” Al-Murshed said.
The company increased its dividend by 4% in each of the past two years, and is now paying more than $81 billion of base dividends, Al-Murshed said. “We’re looking for it to be progressive over the years,” he said, adding that the company’s free cash flow covers that.
Debt sales will be “regular but not too frequent,” Al-Murshed said, adding that it has no plans to sell more this year. “We want to be active, but we don’t want to be too active,” he said. One reason will be to widen the investor base, he said.
Aramco will also look to raise funds by selling “relatively low return businesses and reinvest them into higher return businesses,” Al-Murshed said. The company has sold stakes in its oil and gas pipelines and its chemical unit Sabic has sold metals businesses. That frees up funds for investment in core operations like oil production, he said.
Al-Murshed didn’t specify whether Saudi Aramco would borrow to support its dividend spending, which is set to hit $124 billion this year, exceeding earnings. That resulted in Saudi Aramco recording a net debt position in the third quarter, the first time since the third quarter of 2022. Just a year ago, the firm had over $27 billion in net cash.
Its dividend is made up of two parts — a base payment of $20.3 billion a quarter that takes up about 95% of free cash flow, and a performance-linked portion set at $10.8 billion for each quarter this year.
From next year, the special component is set to be paid as a percentage of residual free cash flow after spending on dividends and investments, CFO Al-Murshed said. “When we close the books for 2024, we’ll plug in that formula and whatever the number is, we will aim to distribute that,” he said.
Saudi Aramco’s gearing ratio — or net debt to equity — of about 2% is low compared to peers. The company isn’t targeting a specific ratio, Al-Murshed said. “You’ll see our gearing ratio go up and come down across the cycles,” he said.
- Ziad Al-Murshed will be featured in the next edition of Bloomberg’s CFO Briefing on Sunday. Sign up here.
--With assistance from Anthony Di Paola and Matthew Martin.
(Updates with dividend outlook in second paragraph, comments on asset sales in eighth.)
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