Saudi Aramco's Dividend Math Doesn't Add Up -- Bloomberg -- June 28, 2020

Over the years I've always gotten a kick out of analysts reporting the meme that due to low "lifting costs," Saudi Arabia has the price advantage.

Right, wrong, or indifferent, I put the country of Saudi Arabia, the House of Saud, and the publicly-traded Saudi Aramco company all in the same arena.

Add "this" to the "lifting costs" for Saudi Aramco: $75 billion in dividends every year.

From Bloomberg Quint today, the Saudi Aramco dividend math doesn't add up (archived):

It’s the mother of all payouts. The $75 billion that Saudi Aramco doles out in dividends every year dwarfs what any other listed company gives to shareholders. It’s roughly equivalent to the payouts from Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., BP Plc, Total SA, PetroChina Co., Eni SpA, Petroleo Brasiliero SA and China Petroleum & Chemical Corp. or Sinopec — put together.

That makes Chief Executive Officer Amin Nasser’s promise ...

Running up debts to keep the dividend on track is standard practice for energy companies amid the carnage of 2020’s oil market — except for those, like Shell, which plan to cut payouts altogether ...

The core of Aramco’s profitability is its astonishingly low production costs, with operating expenses amounting to not much more than $8 a barrel of oil and equivalent products last year. It’s remarkable how quickly the spending adds up, though. Royalties paid to the Saudi state alone added another $10 a barrel or so, while corporate income tax came to around $19 a barrel and dividends swallowed a further $15. Once all those tolls were paid, Aramco didn’t have a lot of spare change left out of $60-a-barrel oil, let alone the stuff in the $40-a-barrel range it’s selling at the moment.

A firm dividend policy is an unusually inflexible cost ...

Perhaps in recognition of this, the Saudi state has from the start agreed to forgo its portion of any payouts to the extent that receiving them would get in the way of Umm-and-Abu investors getting their share. That may help maintain a theoretical $75 billion-a-year payout but it makes a nonsense of the idea that all shareholders are equal, not to mention the principle that a dividend policy is some sort of a commitment to future earnings. It’s not clear, either, why a company with this get-out clause would want to take on debt to meet its promised payments, although Aramco’s borrowing costs are essentially identical to those of the Saudi state.

Dividends aren’t the end of Aramco’s committed spending. Its purchase of a majority stake in chemicals company Saudi Basic Industries Corp., or Sabic, ...

Then there’s a potential $15 billion investment in Reliance Industries Ltd.’s Jamnagar refinery in India, $20 billion on a separate planned chemicals venture with Sabic, plus Sabic’s own $5 billion a year or so of capital spending which will now sit on Aramco’s balance sheet.

Add it all up and the picture is troubling...

For all that executives are confident ...

That path is likely to be constrained ...

Unlike most of its competitors, Saudi Aramco doesn’t really need to be so focused on dividends. All but 1.5% of its shares are held by the same state that’s hoovering up royalty and tax payments further up the income statement. Riyadh shouldn’t really care how it’s getting paid, as long as it’s getting paid.

That dividend policy looks more like a swaggering attempt to hold back the tide of an oil market on the edge of terminal decline. The quicker Aramco acknowledges that, the better equipped it will be to handle the coming turmoil.

Americans would call them "Mom-and-Pop shareholders."

Let's highlight those last three paragraphs:

Unlike most of its competitors, Saudi Aramco doesn’t really need to be so focused on dividends. All but 1.5% of its shares are held by the same state that’s hoovering up royalty and tax payments further up the income statement. Riyadh shouldn’t really care how it’s getting paid, as long as it’s getting paid.

That dividend policy looks more like a swaggering attempt to hold back the tide of an oil market on the edge of terminal decline. The quicker Aramco acknowledges that, the better equipped it will be to handle the coming turmoil.

Americans would call them "Mom-and-Pop shareholders."

No, it's not the government per se that is the focus or the story.

The story here: the "mom-and-pop" shareholders are the 15,000 Saudi princes who are literally stealing the wealth of their country from 98% of other Saudis.

And again, from the article:

The quicker Aramco acknowledges that, the better equipped it will be to handle the coming turmoil.  

I think "Aramco" (aka Prince MbS) has figured that out, and he's ensuring that he and his princes get their "cut" before the house of cards fall.

I was kind of surprised Bloomberg did not note that. Unless the writers thought that might be a bridge too far.

The graphics that Bloomberg provided for this article: