Saudi Aramco is carrying out a new debt issue on the markets by raising $3 billion through sukuk. The company is turning to the bond market for the second time in 2024, after raising $6 billion in July. This raise comes as the company plans to pay out colossal dividends, totaling $124.3 billion for the current year. The sukuk issuance includes two tranches: $1.5 billion over five years, and $1.5 billion over ten years, with respective margins of 85 and 100 basis points above US Treasury bonds.
The objective of this lifting is clear: to compensate for the drop in cash flows generated by oil activities, affected by the production restrictions put in place by OPEC+. These restrictions, intended to maintain crude prices, limit Aramco’s ability to operate at full capacity. As a result, the company is operating at around 25% below its maximum capacities, reducing its oil revenues.
Impact of falling oil prices on Aramco
The global oil environment remains a challenge for Saudi Aramco. Oil prices, although supported by the efforts of OPEC+, have not returned to expected levels. This volatility, combined with production restrictions, has a direct effect on the company’s profitability. Aramco continues to post solid profits, but its liquidity needs are increasingly important to support its financial commitments, notably to the Saudi government, its largest shareholder with an 81.5% stake, as well as the Public Investment Fund (PIF).
The dividends to be paid for 2024, which exceed $124 billion, represent a major strategic issue for the company and for the Saudi economy as a whole. They are used to finance the flagship projects of the Vision 2030 plan, which aims to diversify the Saudi economy beyond oil. However, this high dividend strategy is weighing on the company’s cash flow, already under pressure from falling crude prices and production cuts.
Adjustment strategy to market challenges
The sukuk issuance shows Aramco’s desire to diversify its sources of financing, turning to bonds consistent with Islamic finance to attract regional and international investors. This approach allows the company to maintain financial flexibility in a global context marked by uncertainty. However, the company’s growing debt levels also indicate an increased reliance on financial markets to maintain its operations and meet its commitments to shareholders.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, observes that Aramco’s additional borrowing in 2024 directly reflects the need to cover dividend payments, while cash flow generated from operations is no longer sufficient to finance them. Capital expenditures, necessary to support the future growth of the company and meet the requirements of the Vision 2030 plan, also increase short-term liquidity needs.
Consequences of OPEC+ decisions and future perspectives
Decisions by OPEC+, de facto led by Saudi Arabia, continue to have a direct impact on Aramco’s ability to generate revenue. By limiting production, OPEC+ seeks to stabilize oil prices, but this requires Aramco to reduce its activity on a scale that significantly affects its margins. These oil policy choices, while essential to supporting global prices, weigh heavily on the company’s short-term outlook.
Aramco also faces internal challenges in managing its investments and financial priorities. Although recently issued sukuk bonds have attracted strong demand, reflecting investor confidence in the strength of the company, the frequent use of debt could become a concern if oil market conditions do not improve. The company will have to adjust its strategies based on price fluctuations and uncertainties related to global oil demand.
In the long term, Saudi Aramco’s strategy relies on a delicate balance between maintaining high dividends to support the Saudi economy, and prudently managing its investments and debt. In a market marked by persistent volatility, the company will need to remain agile to meet the expectations of its shareholders while navigating an ever-changing global economic environment.
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