(Source: Aramco financial statements and author projections.)
Aramco paid $98 billion of dividends to its shareholders in 2023, up from $75 billion in 2022. The dividend payout will likely increase further to around $124 billion in 2024. The increase is largely due to the new performance-linked dividend introduced in the third quarter of 2023. This is set at 70% of Aramco’s “free cash flow” (defined as the cash flow from operations after capital expenditures and base dividend payments) in 2022 and 2023 and will be paid on a quarterly basis through the fourth quarter of 2024. The performance-linked dividend is in addition to the usual base dividend that Aramco has paid since 2018.
Government and Public Investment Fund Main Dividend Beneficiaries
Aramco was sitting on a large $135 billion pile of cash and short-term investments at the end of 2022. These holdings had more than doubled since the end of 2020 as higher oil revenue and the sale of stakes in two pipeline companies in 2021 and 2022 boosted liquidity.
Aramco drew on its cash and short-term investments in 2023 to the tune of $33 billion to pay the higher dividend given its capital spending and debt repayments during the year and the drop in oil revenue. Given Aramco’s guidance on its planned capital expenditures in 2024, it is likely that the company will again have to tap its cash and short-term investments to pay dividends this year unless it borrows or sells existing assets. This will not be an issue, however, given its still very sizeable $102 billion in cash and short-term investment holdings at the beginning of the year.
The government and the Public Investment Fund are Aramco’s two largest shareholders and consequently the main beneficiaries of the higher dividend. Indeed, the introduction of the performance-linked dividend is a way for the company to distribute part of its large cash and short-term investment holdings to its largest shareholders who both have greater financing needs than Aramco at present. The PIF received around $5.5 billion of extra dividends in 2023 compared to 2022 and is likely to see a further $12 billion of additional dividends in 2024 (both because of the higher dividend and the additional 8% equity stake that it was given in early March). For the government, the higher 2024 dividend payout will almost make up for the loss of the 8% equity stake in Aramco that was transferred to the PIF. The loss of dividends relative to the 2024 budget is likely to be in the $1 billion to $2 billion range. Higher dividends will of course also make any public sale of Aramco shares more attractive to investors.
Sustainable Beyond 2024?
Aramco’s 2023 Annual Report noted: “Looking forward to the full-year results of 2024 and onward, our intention is for any performance-linked dividends to be in the amount of 50-70% of the Group’s annual free cash flow.” This suggests that Aramco intends to continue to pay additional dividends beyond the fourth quarter of 2024. The question is whether it will be able to do so if oil revenue remains around current levels. Two constraints may come into play.
First, free cash flow in 2024 and 2025 will be much lower than the 2022-23 average (the basis on which the performance-linked dividends are currently being paid) unless there is a substantial increase in oil revenue. Hence, the performance-linked dividend in 2025 will be much lower than that currently being paid if the formula set out by Aramco is used. A rough calculation suggests a total dividend (base plus performance-linked) of just over $90 billion in 2025, some $30 billion below that expected in 2024. This would leave a hole in the government budget and the PIF’s income unless other sources of revenue are identified.
(Source: Aramco financial statements and author projections.)
Notes: s/t=short-term. 2021-23 is actual data, 2024 and 2025 are projections. Projections for net cash flows from operations are based on average oil production of 9.2 million barrels per day and 9.5 mb/d in 2024 and 2025 and an average oil price of $85 per barrel. Capital spending is defined to include acquisition of affiliates, additional investment in joint ventures and affiliates, and net investments in securities. The performance-linked dividend in 2025 is assumed to be 70% of estimated 2024 free cash flow.
Second, even if the formula for calculating the performance-linked dividend is adjusted or the base dividend is increased to ensure the total dividend does not fall sharply in 2025, the stock of cash and short-term investments will eventually become a constraint. Some minimum level of cash is needed to ensure the smooth running of the company. While it is not possible to know what this minimum level is, cash and liquid asset holdings would fall below their level at the end of 2018 during 2025 if dividends are maintained at their 2024 level. This suggests that 2025 will be the last year the higher dividend can be paid in the absence of higher oil prices, asset sales, or debt issuance.
Higher Oil Revenue Needed
Aramco’s payment of performance-linked dividends is helping distribute part of its large cash and short-term investment holdings to the PIF and government who need additional revenue to finance their spending and investment. If Aramco is to sustain this higher dividend payout beyond 2025, however, it will need increased oil revenue to boost its cash flow or it will need to borrow or sell assets.
This narrative is consistent with the broader view that higher oil revenue will eventually be needed to sustain the current pace of spending by the PIF and government. At present, there are still considerable liquid assets sitting in the public sector that can be tapped to provide resources, particularly for the PIF. These pools of liquidity, however, will eventually be exhausted. New investments will then become increasingly reliant on a rebound in oil revenue, borrowing, or the sale of existing assets to local private and foreign investors.
The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.
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