Saudi Aramco plans to make even deeper cuts to its capital spending to help pay for the $75bn in dividends the state energy group promised investors at its initial public offering last year.
As the company wrestles with the hit to its finances from the coronavirus crisis, Saudi Aramco is now targeting capex of $20bn to $25bn this year, according to three people familiar with the matter. In March it had earmarked $25bn to $30bn, down from last year’s $32.8bn.
The new level of capex, which is largely dedicated to the group’s exploration and production business, is expected to hold for 2021, 2022 and 2023 if oil prices remain at current levels, the people said.
The retrenchment by Saudi Aramco comes after the group on Sunday laid bare the damage the pandemic has inflicted on its profits, which fell 73 per cent in the second quarter.
Alongside its results, the oil producer added that it expected spending to be at the lower end of the $25bn to $30bn it had forecast for this year and said next year will be “significantly lower” than the $40bn-$45bn signalled at the time of the IPO.
“Aramco like every other oil company is facing budgetary pressures,” said Jason Gammel, an analyst at Jefferies. “But the government is reliant on its cash flows.”
In contrast to some rival producers, Saudi Aramco is sticking to a pledge to pay the dividend in full both to the government — the company’s majority owner with a 98 per cent stake — and minority investors who receive priority payments on a pro-rata basis.
Riyadh relies on oil sales for about 64 per cent of its revenue and has acknowledged it faces an “extreme crisis”. After plunging from $70 a barrel in January to $20 in April, oil prices have recovered but only to about $44 a barrel.
Saudi Aramco is also delaying projects, suspending drilling in some and stalling some deal activity. Analysts had forecast spending of between $26bn and $38bn for the coming years.
“They’re reviewing everything,” one of the people familiar with the matter said.
Free cash flow of $21.2bn in the first half of this year was insufficient to cover the promised dividend payments of $37.5bn for the period.
While the company would prefer to pay the dividend using cash generated by its operations, chief executive Amin Nasser has said it could also take out loans or issue bonds to finance the payouts. Saudi Aramco’s debt levels have also surged as the group has pressed ahead with its $69bn deal for a majority stake in chemicals company Sabic.
“We have a comprehensive and disciplined internal approval process for capital expenditures, new projects and debt incurrence,” a spokesperson for Saudi Aramco said.
Analysts have said Saudi Aramco’s ultra-low production costs mean that a drop in spending will not result in a fall in output — a contrast to other oil majors that have outlined billions of dollars in spending cuts.
However, they question how the company plans to increase production capacity by an extra 1m barrels a day to 13m b/d, as requested by Riyadh which dictates output policy.
Although Mr Nasser said this week the planned increase in production capacity “should not have a major impact on capital in 2021”, two people familiar with the matter said delivering the increase will be very costly.
Saudi Arabia is hoping to use the crisis to capture more market share as production from other regions falls. The company’s output hit a record 12.1m barrels a day in April as the kingdom embarked on a price war, but two months later fell to 7.5m b/d as Saudi Arabia led Opec in production curbs to stabilise the oil price.