Saudi Aramco left its third-quarter dividend unchanged at $18.75 billion even as it failed to generate enough cash to cover the payout and reported a 45% drop in profit. The world’s biggest oil company generated free cash flow of $12.4 billion between July and September, down from $20.6 billion a year earlier as coronavirus lockdowns hit demand for energy and refining margins. Aramco’s dividends are a vital source of cash for the Saudi Arabian government, whose budget deficit is expected to widen to 12% of gross domestic product in 2020 amid a severe economic contraction.

Yet the company, 98% owned by the government, probably won’t be able to continue paying out such high dividends unless oil prices, down almost 40% in 2020, rise, Moody’s Investors Service said last month. Aramco’s total payments to the kingdom, including taxes and royalties, fell 30% in the three months to the end of September to $24.6 billion.

Big Payout

Aramco’s not generating enough cash to cover its $18.75 billion dividends

Source: Saudi Aramco

“Aramco covered the lion’s share of its dividend this quarter, which, given the macro environment at $42 a barrel and abysmal refining margins, is quite an accomplishment,” Royal Bank of Canada analyst Biraj Borkhataria said in a research note. Net income at the state energy firm was 44.2 billion riyals ($11.8 billion), slightly ahead of analysts’ expectations. Gearing climbed to 21.8% from 20% in June and from minus 5% in March, when Aramco had more cash than debt.

Aramco’s shares closed 0.6% higher at 34.40 riyals in Riyadh, paring this year’s drop to 2.4%. The stock has been bolstered by management’s pledge to pay a $75 billion dividend annually for five years after the completion of last December’s initial public offering.

That promise, along with a $69 billion acquisition of chemicals maker Saudi Basic Industries Corp., has seen debt levels balloon even with Aramco cutting capital expenditure and laying-off hundreds of foreign workers. Net debt rose $6 billion to $83 billion by the end of the third quarter, putting the company even further from its gearing target of between 5% and 15%.

Aramco may have to take on more debt to fund the dividend payments given its slumping cash flow. It drew down a $10 billion loan in late July. That revolving credit facility matures in May 2021, though it can be extended for another year.

“Every sign points to a belief within the company of further macro and oil recovery,” Alastair Syme, a London-based analyst at Citigroup Inc., said. Aramco’s advantage over other big oil firms is that “it has the balance sheet to see it through if the recovery takes a little longer,” he said.

While income fell year-on-year, it increased for the first time in five quarters as oil prices steadied following their battering earlier in 2020.

“We saw early signs of a recovery in the third quarter due to improved economic activity,” Chief Executive Officer Amin Nasser said. “We continue to adopt a disciplined and flexible approach to capital allocation in the face of market volatility.”