191117 saudi aramco
Aramco shareholders, especially the Saudi government, will be happy with the first quarter dividend payout. Image Credit: Reuters

Riyadh: Saudi Aramco has retained its massive dividend despite a 25 per cent plunge in profit - and signaled it would keep spending in check as it braces for deeper damage from the oil crisis.

The world's most valuable listed company, will pay a dividend of $18.75 billion for the first three months of 2020. That would leave it on track to meet its full-year goal of $75 billion, though it didn't specify if it was still committed to that number.

The payout is crucial for the kingdom, which holds about 98 per cent of Aramco and is facing its worst financial turmoil in decades as revenue falls.

At the time of Aramco's record initial public offering in December, the dividend was a huge part of its appeal. A stress test carried out by JPMorgan Chase & Co. showed that if oil fell to $40 a barrel and production was 9 million barrels a day, Aramco would only remain within its self-imposed borrowing target if it cut the dividend by 30 per cent and slashed spending dramatically.

Freefall in prices

Arab Light crude, one of the nation's main grades, plunged to as little as $13.34 a barrel last month as an OPEC+ agreement to curb supply fell apart and Saudi Arabia ramped up production. The kingdom has now changed tack and pledged to reduce output to an 18-year-low of 7.5 million barrels a day in June.

The war over marketshare started just as the first quarter was ending, and the impact of low prices will probably be more pronounced in the second quarter. It was in April that benchmark prices turned negative in the US for the first time.

"Clearly, Aramco's financial metrics will deteriorate significantly in the second quarter, like its peers," said Biraj Borkhataria and Erwan Keroureda, energy analysts at Royal Bank of Canada.

Oil giants turn less generous

Big Oil's generous payouts have long been a key attraction for shareholders, but now they are threatened. Exxon Mobil Corp. last month froze its dividend for the first time in 13 years while slashing capital expenditure, and Royal Dutch Shell Plc cut payouts for the first time since the Second World War.

Aramco's first quarter free cashflow came in at $15 billion, less than the dividend for the period. "Effectively, Aramco would be borrowing to pay its dividend, which cannot be sustainable in the long term," said analysts at AllianceBernstein including Neil Beveridge and Oswald Clint.

Crude Truce

"We retain significant flexibility to adjust expenditures and have considerable experience in managing the business through times of adversity," Aramco's CEOAmin Nasser said. "This resilience will enable us to continue delivering on our commitments to our shareholders."

It could generate about $133 billion for the government in 2020 across royalties, taxes and dividends, according to Credit Suisse Group AG. That's "a far cry from what it had expected originally and insufficient to cover the original government budget," analyst Thomas Adolff said in a research note.

Saudi Arabia needs an oil price of $76 a barrel to balance its budget this year, according to the International Monetary Fund. But efforts to contain the coronavirus pandemic by shuttering swathes of the world economy have seen Brent crude more than halve since the end of 2019 to $30.33 a barrel.

Aramco has already decreased spending to protect shareholder payouts. The company said in March that it would limit capital expenditure to $30 billion in 2020, down from previous plans to spend as much as $40 billion.