Saudi Arabia’s oil giant Aramco is considering additional cuts to its capital expenditure (capex) in order to be able to pay its massive dividends, the Financial Times reported on Wednesday, quoting three people with knowledge of the plans.
If oil prices continue to hold at the current levels at around $45 a barrel Brent Crude, Aramco will target capex of between US$20 billion and US$25 billion between 2021 and 2023, according to FT’s sources.
In March, when oil prices crashed and Saudi Aramco’s profit started to decline as a result, the Saudi giant said that it continues to expect capital expenditures for 2020 to be between US$25 billion to US$30 billion, down from US$32.8 billion for 2019.
In the second quarter, Aramco recalibrated capex and optimized operations as it reported a plunge in profits. The oil firm, however, pledged to stick to its plan to distribute dividends of US$18.75 billion for the second quarter despite taking a severe hit to its earnings.
Aramco guided in the Q2 results release for capex at the lower end of the US$25 billion-US$30 billion range for 2020.
Now, according to FT’s sources, the Saudi oil giant is looking to make additional capex cuts to continue supporting its promise to pay dividends.
Aramco has also put under review all spending and projects, according to one of the sources, who told the FT “They’re reviewing everything.”
Unlike the European oil majors, many of which cut their dividends in the wake of the price crash, Aramco pledges to pay US$75 billion annually in dividends as promised in its initial public offering (IPO) prospectus last year.
Cutting costs and taking on more debt are the two logical sources of money for the Saudi oil giant, considering that its free cash flow has also plunged with the low oil prices and low oil demand.
By Tsvetana Paraskova for Oilprice.com
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Aramco should learn from supermajors like Shell, BP and Equinor who were recently forced to cut dividends drastically because the alternative would have been to sink deeper under the weight of their outstanding debts.
Even a giant like Saudi Aramco has had to borrow substantially in order to finance its purchase of a majority share in Saudi Petrochemical SABIC. Therefore, instead of paying dividends of $18.75 bn, Saudi Aramco should cut dividends to only $3.3 bn, half of its earnings and use the balance to pay off part of its outstanding debts or to limit the cut in its capex.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London