(Bloomberg) – Saudi Aramco will increase dividend payments and pay less tax when the government tries to secure the $ 2 trillion valuation targeted by Crown Prince Mohammed bin Salman in the state oil company's first public offering.
The state-owned company, which produces about 10% of the world's oil, plans to announce its intention to float later this month with a view to selling shares on the Riyadh stock exchange as soon as November. The IPO is the centerpiece of the Crown Prince's plans to restore the Saudi economy and will release billions of capital into the kingdom's sovereign wealth fund.
The 2020 payment is part of the plan for a growing, progressive dividend for investors, according to a company presentation posted on the company's website on Monday.
A $ 75 billion dividend would give investors a return of 3.75% if the company achieves its ambitions of $ 2 trillion. Although a decent payout in a low-interest world, it's a lower dividend than other Big Oil companies: investors in Shell get 6.22%, while Exxon pays out 4.9%, according to data compiled by Bloomberg.
receive only slightly higher returns than bond investors – the return on the company's 2029 bond is around 3%.
Aramco can further increase its dividend with one-off profits to shareholders. It paid a special dividend of $ 20 billion in the first half, based on an "unusually strong financial performance" in 2018, the company said in August. Although the payment saw the company's cash increased significantly.
In an effort to reassure potential investors, the company also said that if the total dividend falls below $ 75 billion between 2020 and 2024, it will prioritize payments to non-government shareholders.  The presentation also showed a changed schedule for excise duty on oil production. Payment will be lower when oil is below $ 70 per barrel, but higher above this level. During a new royalty structure in effect from January, Aramco will pay 15% for Brent prices up to $ 70 per barrel, 45% for Brent prices between $ 70 per barrel and $ 100 per barrel, and 80% for Brent prices over $ 100 a barrel. The current tax regime, introduced in January 2017, started at 20% and reached a peak of 50%.
This is the third time Saudi Arabia has adjusted its tax burden in the start of the IPO. In 2017, the income tax Aramco pays on profits was cut from 85% to 50%. The sliding royalty scale that just changed was first introduced last year.
The changes are aimed at meeting Prince Mohammed's ambition of $ 2 trillion worth of the kingdom's crown jewel. An original plan to list the company on an international stock exchange at the same time as Riyadh was dropped last year after international investors appreciated the valuation.
The new royalty structure will be a significant boost in today's oil prices – the equivalent of about $ 3 per barrel for each of the 9.8 million barrels the company produces daily.
Aramco also announced considerable room to borrow. The company will target net gearing, a measure of debt in relation to a company's equity value, between 5% and 15% through the oil price cycle, the presentation states. Although lower than other major oil companies, it is a major change for a business that traditionally has very little debt.
With a 2.4% leverage at the end of June, Aramco has the opportunity to double its debt level and meet the lower threshold of target ratio.
But even under Aramco's new financial framework, Saudi investors have other options that will yield better returns than an Aramco worth $ 2 trillion. Nearly 20 companies listed on the local stock exchange have dividend yields above 4%, including Saudi British Bank, Advanced Petrochemicals Co. and Saudi Basic Industries Corp., according to data compiled by Bloomberg.
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