Aramco’s third quarter financial results show that while the company remains a cash generating machine, lower oil prices and weaker downstream margins have hurt its net income in 2024. The company’s net income was $84 billion in the first three quarters of 2024 compared to $95 billion during the same period in 2023.  

Despite this drop in net income, Aramco has upped its dividend payout and increased its capital spending. The company will pay $124 billion of dividends in 2024 compared to $98 billion in 2023 and $75 billion in 2022. This reflects Aramco’s decision since the third quarter of 2023 to pay a performance-linked dividend in addition to its base dividend. The performance-related dividend is set at 70% of free cash flow in 2022 and 2023 (cash flow less capital spending and the base dividend). Guidance provided by Aramco executives during their recent earnings call with investors was that capital spending in 2024 would be in the range of $51 billion to $54 billion compared to $50 billion in 2023 and $39 billion in 2022. 

Aramco had $135 billion of cash and short-term investments on its balance sheet at the end of 2022. As a result of lower revenue and higher dividend payments, the company’s net income before interest and tax has not been sufficient to cover its tax, royalty, and dividend payments this year. Consequently, there has been a sizeable drawdown in cash and short-term investments, which fell to $70 billion in the third quarter of 2024. Debt has also increased modestly.

Unsustainable Dividend 

Aramco will struggle to maintain its dividend at the 2024 level unless there is an upturn in oil revenue. If the company’s net income remains around its current level, and it continues with its current dividend and capital spending policies, its cash cushion will quickly erode in the absence of stepped-up borrowing or asset sales. A rough calculation suggests that the company would need around $50 billion of cash drawdown, new borrowing, or revenue from asset sales to maintain the 2024 dividend into 2025 while meeting its capital spending target.  

Aramco has made no commitment to a particular dividend payout in 2025. It has only said that it will maintain the concept of a performance-related dividend. If it is assumed that the formula for calculating the performance-related dividend remains the same – 70% of free cash flow in the preceding two years (now 2023 and 2024) – and that the base dividend in 2025 increases by 4% (the same increase as in 2024), the total dividend paid by Aramco in 2025 would be around $100 billion. Even with this lower dividend payout, Aramco would still burn through its cash in 2025, just at a slower pace.  

Implications for the Government and Public Investment Fund 

As the two largest shareholders, the government and the Public Investment Fund are benefitting the most from Aramco’s higher dividend payout and therefore have the most to lose from any cutbacks.  

The good news is that the “FY2025 Pre-Budget Statement” recently published by the Ministry of Finance assumes that government revenue will decline (by 4%) in 2025, although no breakdown between oil and non-oil revenue was provided. However, as there is no reason to expect non-oil revenue to decline, it seems that the ministry may be expecting oil revenue to decline by around $27 billion in 2025 (slightly more than the potential loss of dividends suggested by the above calculations). Consequently, while there is always uncertainty about the revenue outlook given the volatility of the global oil market, at this stage the revenue projection in the “Pre-Budget Statement” looks reasonable. There are more questions about the 2025 spending projections. Nominal spending is projected to decline by 5% in 2025, and this may prove difficult to achieve.  

The PIF has announced that it will increase its investments in the domestic economy from $40 billion to $70 billion a year. A reduction in Aramco’s dividend payment is not helpful against the background of rising financing needs. The PIF will increasingly need to find alternative sources of financing with the recently announced deals with foreign banks and financial institutions helping in this regard.  

Financing Vision 2030 

Aramco’s very strong balance sheet has been used to help the government and PIF finance their spending on Vision 2030 projects over the past two years. As this source of financing becomes more constrained, the Vision 2030 projects are likely to be increasingly financed by debt unless oil revenue rebounds. The good news is that net public sector debt in Saudi Arabia is low. The bad news is that it has increased substantially over the past decade. Further, issuing in international markets in 2025 at the level of 2024 may test investor appetite for Saudi public sector debt and push borrowing costs higher.