Cash strapped Saudi Aramco to return to bond market

Cash strapped Saudi Aramco to return to bond market

Saudi Arabia’s state-controlled oil giant Aramco said on Monday it will return to the bond market, as it seeks to raise cash to help pay for billions of dollars in dividends the company has promised shareholders even as the coronavirus crisis continues to hammer oil demand.

Aramco has committed to shareholder payouts totalling $18.75bn in the third quarter, despite profits for the quarter falling nearly 45 percent.

The lion’s share of investor payouts goes to the Saudi government, which faces a yawning budget deficit as the pandemic has continued to depress crude prices.

The kingdom needs oil to fetch more than $78 a barrel to balance its books this year, according to the IMF.

On Monday, global benchmark Brent crude was trading at approximately $44 a barrel.

Aramco said it plans to issue international bonds in tranches ranging in maturity from three to 50 years with a minimum subscription of $200,000.

The company did not disclose how much it is seeking to raise, but Bloomberg News, citing two people familiar with the deal, said the oil company could raise in the neighbourhood of $6bn,

Last year, Aramco went public with a listing on the Saudi stock exchange after foreign investors showed limited enthusiasm for the deal.

Selling a small portion of the oil giant is part of Crown Prince Mohammed bin Salman’s (MBS) grand scheme to diversify the Saudi economy and create jobs for its legions of youths by reinvesting fossil fuel profits into more sustainable industries of the future – a programme that has so far shown very modest success.

The decision to pay an annual $75bn in dividends was made at a time when Aramco was the world’s most profitable company, and before the coronavirus pandemic decimated oil demand and MBS launched an ill-considered oil price war that hastened a crash in energy prices earlier this year.

Saudi Arabia and other major oil-producing nations including Russia have since slashed production to buoy crude prices against further losses.

Aramco, which has exclusive rights to produce and sell the kingdom’s energy reserves, saw earnings plunge by 50 percent in the first half of 2020. It has also lost its crown as the world’s most valuable listed company.

Aramco’s third-quarter earnings of $11.8bn showed a slight improvement from the first six months of the year.

This month, Fitch Ratings revised Aramco’s outlook to negative from stable, but affirmed the company’s long-term “A” rating. Fitch said Aramco’s ambitious dividend target could result in cash flow turning negative in 2020 and 2021, before breaking even in 2022.