Saudi Arabian Oil plans to take on more debt and will focus on “value and growth” for its dividend, the company’s finance chief said.
“You’ll see us do a couple of things. One is, just take on more debt compared with 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.”
Saudi Aramco tapped debt investors earlier this year when it sold US$6 billion of dollar-denominated bonds in June, followed by about US$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 state-owned oil producer is a vital component of the Saudi Arabian economy, with its crude sales and generous payouts helping fund Crown Prince Mohammed 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.
Saudi Aramco increased its dividend by 4 per cent in each of the past two years, and is now paying more than US$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.
The company’s debt sales will be “regular but not too frequent,” its CFO said, adding that it has no plans to sell more debt for the remainder of 2024. “We want to be active, but we don’t want to be too active,” he said. One reason for the company to sell debt will be to widen its investor base, he said.
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Al-Murshed didn’t specify whether Saudi Aramco would borrow to support its dividend spending, which is set to hit US$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 US$27 billion in net cash.
Its dividend is made up of two parts – a base payment of US$20.3 billion a quarter that takes up about 95 per cent of free cash flow, and a performance-linked portion that is set at US$10.8 billion each quarter this year.
From next year onward, 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 per cent is low compared with 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. BLOOMBERG
