Saudi Aramco is using the rise in oil prices to reduce leverage and invest in increasing production capacity, bucking the trend among international rivals to raise returns to shareholders.

The state-backed oil company, which listed a sliver of its shares in 2019, maintained its dividend at $18.8 billion in the second quarter even as net income almost quadrupled from the same period last year to $25.5 billion. Oil prices recovered to more than $70 a barrel in the quarter.

Analysts had expected net income of about $24.7 billion for the quarter.

Amin Nasser, Saudi Aramco’s CEO, indicated that while the dividend could be increased in the future, the world’s largest oil producing company saw an opportunity to increase its maximum output capacity.

Many western oil majors expect their own production to decline over the coming decade, partly under pressure from governments and investors to cut emissions and invest more in renewable energy.

“Seeing that there is a lot of under-investment in [oil] supply it’s a great opportunity for us,” Nasser said on Aug. 8. “We are diligently working to increase capacity.”

The company is about two years away from completing the planning and design phase for its targeted capacity increase from 12 million barrels a day (MMbbl/d) to 13 MMbbl/d, Nasser said, adding that he expected global oil demand to return to its pre-pandemic level of about 100 MMbbl/d next year.

The company is investing about $35 billion in capex this year, in line with previous guidance but with about 15% more spent in the first half of this year compared with the same period in 2020.

Saudi Aramco, whose largest shareholder is the Saudi Arabian government with 98% of its shares, borrowed heavily to maintain its dividend during the slump in prices caused by the coronavirus pandemic last year. It is the main source of revenues for the kingdom, but was largely free of net debt at the start of 2020.

Borrowing also rose last year after it was forced to absorb the $69 billion acquisition of a majority stake in Sabic, the Saudi chemicals company, from the kingdom’s Public Investment Fund at the time of a cash crunch.

Some analysts have warned that after companies such as BP and Royal Dutch Shell boosted returns to investors in recent weeks, Saudi Aramco’s dividend yield risked falling behind, down to about 4% versus about 5% for rivals.

“It’s important to note that during the downturn last year we maintained our dividend,” Ziad al-Murshed, Saudi Aramco’s acting CFO said on Aug. 8.

“For now our dividend is staying at the normal level for the second quarter but, again, we’ll advise later this year whether we’ll be sticking to the ordinary dividend or doing more.”

Gearing, which Saudi Aramco defines as a measure of the degree to which operations are financed by debt, surged from minus 4.9% in the first quarter of 2020 to 23% in December and stayed at that level in the first quarter of this year.

In the second quarter, however, the company reduced that level to 19.4%, a move it attributed primarily to higher cash flows, including a $12.4 billion transaction to sell a stake in its pipeline system to a consortium of international investors.

Saudi Aramco has pledged to pay the bulk of $75 billion in annual dividends to the government, alongside taxes and royalties, but it is also expected to lead a new domestic investment plan to modernize Saudi Arabia. That may restrict its ability to hand out more cash to investors in its shares on Riyadh’s Tadawul exchange.

However, the recovery in oil prices has raised questions over whether there could be a future windfall. Developed economies have started to open up thanks to vaccine rollouts, boosting demand for fuel after it fell sharply last year.

The crude price has also been boosted by Saudi Arabia and its allies in the OPEC+ group restricting oil production since April of last year, though they have slowly started adding barrels back to the market as consumption has picked up.


Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.