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LAST week, Aramco announced its plan to issue international bonds in tranches ranging in maturity from 3 to 50 years with a minimum subscription of $200,000. The intention is to pay dividends of $75 billion by the year end, as promised to its shareholders upon its call to sell five percent shares of Saudi Aramco and allow them to be traded openly in the market.
The aim is to collect about $8 billion within the coming weeks, if not already, and it is now six times oversubscribed. Strangely, this comes with a slight yield premium over Saudi sovereign, contrary to last year’s $12 billion issue of April which was a small discount.
The financial results for all oil companies are down as they were hit hard by COVID-19 crisis, resulting in low demand as well as low oil prices that hit $ 20 level. Even though the prices are recovering slowly, most companies are reporting huge losses almost in every sector, and most importantly, low oil income and poor dividends to their shareholders.
Oil producing countries are recording huge deficits, and consequently shortage in annual budget as well as in cash, leading them to seek and use all kinds of financial means, as the oil price is not moving above the $50 level any time soon. For Saudi Aramco, its profitability faced a great setback from $ 21 billion in the third quarter to $12 billion this year, with the total profit reaching about $35 billion or 50 percent less in comparison to last year. Cash generation is a nightmare for Aramco.
It generated close to $35 billion of free cash in nine months, which is less than twothirds of its needed dividends. As a result, Aramco had to go to the bond market seeking around $ 8 billion to cater for the promised dividends, and to pay for the shares and its acquisition of Saudi Sabic at $70 billion last year. Certainly, this current year has been bad, and oil companies are hoping for a better year to come… if it comes.
Is it normal to commit such high dividends of $ 75 billion before going public, despite the main shareholder being the Saudi government with 95 percent ownership? With Aramco’s experience, will other oil producing countries that are desperate for cash go for the same? Will Kuwait, Iraq, Libya and Algeria follow suit? Iraq, with its vast oil reserve, will most likely copy Saudi, and try to sell part of its oil industry, as most of the reputable international oil companies are operating there.
Perhaps it is an opportunity in terms of being the easiest method to get some huge cash, especially since Iraq has mostly easy oils and it does not need any high technology. There is no choice left for the oil-dependent countries. To diversify is a farfetched objective, so, as long as they have it and used it as collateral, why not especially in the absence of a long-term strategy.
By Kamel Al-Harami Independent Oil Analyst