75 Billion Dollar Dividend
75 Billion Dollar Dividend
Aramco, and the Four Comma Club
“Tres Comas - you know what that means in Spanish? Three Commas” - Russ Hanneman
ARAMCO.
Aramco plans to pay a base dividend of $75BN in 2020.
This week’s news from Saudi Arabia is about the Aramco IPO, and that’s a good thing.
The 2020 Aramco Dividend Policy, subtly disclosed in this Investor Presentation, is the story, and it matters because Aramco is still trying to find anchor investors for its IPO.
And it’s not that they are having trouble finding investors, it’s that Aramco is not finding investor demand at the two trillion dollar valuation that it’s seeking.
Two trillion…
On the other hand, a trillion dollar valuation… Amazon, Apple, and Microsoft have briefly touched that level.
But that’s about it.
Aramco wants four commas, twice over.
And, if there were no royalty payments to the Saudi government, they would get that, and then some.
Aramco did over $200BN in EBIT in 2018, more than the Five Majors combined.
With 60% operating margins & The Prize of Prizes, there’s only two things that really affect Aramco’s valuation:
Crude Prices
The Saudi Government’s take
The Saudi desire to IPO Aramco has coincided with a decline in crude prices.
Therefore, the only move (to increase Aramco’s valuation) has been to decrease the royalty rate (tax) that the Saudi government receives.
And, changes to that royalty rate have been made, begrudgingly:
Prior to 2017, the tax on Aramco was 85%
In 2017, during IPO attempt 1, Aramco dropped the tax to 50%
However, a switch in benchmarks was made, effectively increasing Saudi’s take by ~7%
After re-starting the IPO process, Aramco made changes to the royalty rate, again, likely due to investor feedback:
The change, and the feedback from investors, is bearish for crude prices.
The changes are a trade-off, in effect: Aramco is offering investors better economics in low oil price environments, in exchange for Saudi getting a larger take in high price scenarios.
Oh, and the Saudis still have this royalty rate benchmarked to Brent, so it’s ~5%+ higher than stated. Also, note that these rates are progressive.
BANKRUPTCIES.
Using words that are typically reserved for a celebrity entering rehab, EP Energy filed for bankruptcy, just after midnight. Kudos to the PR / IR team behind the press release.
In loosely related news, Abraxas published an operational update, including the following statement:
“Drilling operations in the Delaware Basin have been suspended…”
For context, analysts and operators (until ~August) were publishing 20+% well head IRRs on most Delaware projects.
Since then, well, statements like above are becoming more common…
OPEC NEWS.
Ecuador announced that it is leaving OPEC… for the second time!
We wouldn’t rule out a 3rd marriage - give it ~15 years.
OTHER NEWS.
Equinor gave Saipem a contract to deliver underwater drones (1st under water drone contract)
There was a wild Dutch Tractor Climate Protest, earlier this week
Kimmeridge raised a 5th fund
And, that’s it for this week - we’ll be back Tuesday -
*Prices as of ~2pm