Authored by Simon Watkins via OilPrice.com,

The initial public offering (IPO) of Saudi Aramco that was heralded by Crown Prince Mohammed bin Salman (MbS) as being a showcase flotation for raising massive new capital for the Kingdom and anchoring a major expansion of its international equities market presence has proven only to put Aramco into a debt spiral and highlighted a myriad of problems in Saudi Arabia to international investors. Now, Aramco is digging itself further into serious debt through bond issuances simply to pay for the huge dividend payments promised by MbS that were absolutely required to persuade anyone to buy into the omni-toxic IPO.

At this rate, the debt taken on by Aramco and other Saudi bond offerings to pay for the dividends will be far more than the amount of money raised in the IPO. As a direct result of MbS deciding to go ahead with yet another oil price war at the same time as the COVID-19 pandemic was gathering pace and destroying demand for oil, Aramco’s finances have suffered a massive hit. For the first half of this year, the company saw a 50 percent plunge in net profit and at the beginning of this month, it reported another massive drop in profits of 44.6 percent for the third quarter, falling to SAR44.21 billion (US$11.79 billion) from SAR79.84 billion in the same period last year. On the other side of the balance sheet, though, is the stark fact that because the company’s IPO was so toxic on so many levels that it was shunned by Western investors and had to be off-loaded to buyers who were either bullied or bribed into buying the stock Aramco is left having to pay massive guaranteed dividend payments for the foreseeable future to those shareholders.

This huge guaranteed dividend payment of US$18.75 billion per quarter – US$75 billion for a full year – will have to be paid for through budget cuts over and above the US$15 billion in Aramco’s annual capital spending alluded to by Aramco’s chief executive officer, Amin Nasser, just after the first half profits figures were unveiled. This will take the total down from around US$40 billion to around US$25 billion. Further reports have stated that even this US$25 billion figure is set to be reduced by another US$5 billion, taking the total capital spending in this year from US$25 billion to US$20 billion. 

Whatever the cuts, it remains the case that the first two dividends together for the first two quarters of this year – US$37.5 billion – far outstripped Aramco’s total free cash flow of US$21.1 billion for the same period. The latest profits number for the third quarter, meanwhile, covers just 62.88 percent of the dividend payment, never mind any other expenses or investment for projects ongoing or planned that Aramco may have had in mind. To put this even more clearly: Aramco’s entire profit for the third quarter cannot even cover the dividend it owes for the same quarter, not even two-thirds of it!

As a result so far of the slide in Aramco’s profits, the once much-vaunted flagship US$20 billion crude-to-chemicals plant at Yanbu on Saudi’s Red Sea coast has been indefinitely suspended, according to various reports. The similarly high-profile purchase of a 25 percent multi-billion-dollar stake in Sempra Energy’s liquefied natural gas (LNG) terminal in Texas is also apparently under threat, although Sempra for its part has said that it continued to work with Aramco and others “to move our project at Port Arthur LNG forward.” In the same vein, according to various news sources, Aramco has suspended its key US$10 billion deal to expand into mainland China’s refining and petrochemicals sector, via a complex in the Northeastern province of Liaoning that would have seen Saudi supply up to 70 percent of the crude oil for the planned 300,000 barrels per day refinery. In sum, it appears that all of Aramco’s principal projects aimed at diversifying Saudi Arabia away from the relatively zero added-value pursuits of just pumping and selling crude oil are now subject to review and/or outright suspension.

The chances of these – and other stalled projects – being resuscitated with money from other Saudi government departments looks minimal, as MbS’s second oil price war has similarly decimated these finances too. Figures released at the end of September showed that Saudi Arabia’s economy contracted 7 percent year-on-year (y-o-y) in the second quarter of 2020, with the Kingdom’s private sector showing a negative growth rate of 10.1 percent, while the public sector recorded negative growth of 3.5 percent. Saudi’s oil revenue in the first half of the year was 35 percent lower than a year earlier, while non-oil revenue fell by 37 percent. Moreover, in the second quarter of 2020 alone, the Kingdom’s petroleum refining activities recorded a 14 percent y-o-y drop. All of this resulted in a current account deficit of SAR67.4 billion (US$18 billion), or 12 percent of GDP, in Q220 compared with a surplus of SAR42.9 billion, or 5.8 percent of GDP, a year earlier, according to Saudi Arabia’s General Authority for Statistics. 

Therefore, Aramco has little choice but to continue to fund the dividend payments to its own shareholders by taking on more debt, in direct contrast to the influx of new money that MbS said would flow into Aramco and then more broadly into the Saudi Tadawul stock market following the ‘landmark IPO’. In essence, Aramco has been left to take on debt to pay the people who bought it shares, which is akin to a family who decides that it has to sell the precious family silver to pay off debts but then ending up having to take out more debts to pay people to buy the silver. 

Moreover, judging from last week’s bond sale by Aramco, it appears that even those investors who have been willing to buy the company’s paper – so increasing their risk exposure to not just to the omni-toxic Aramco but also to Saudi as a sovereign issuer – might be reaching the limit of their appetite for either. Saudi had been looking to raise US$8 billion from the five-part bond deal, which it did, but crucially it attracted just US$48.1 billion in orders for the debt sale, less than half of the amount that it received for its debut bond sale last year when it raised US$12 billion. Even more indicative of increasing investor caution in taking on more exposure to Saudi risk – especially that of the increasingly indebted (bonds plus dividend obligations plus revolving credit lines) Aramco – is that in last year’s bond sale Aramco was able to price the bonds at a tighter spread to the benchmark than Saudi sovereign debt but this time Aramco’s bonds were priced wider.