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By Yousef Saba and Luke Tyson

DUBAI, Aug 5 (Reuters) - Saudi Aramco reported a 22 percent drop in second-quarter profit on Tuesday , as the world's largest oil exporter said it would cut costs and look to divest assets as crude prices slump and its debts rise.

The company's generous dividends, a key source of funding for the kingdom's ambitious plans to reduce its dependence on oil, will see a drop of about a third this year.

Aramco announced its tenth-quarterly net profit decline, to $22.7 billion in the quarter ending in June, compared to $29.1 billion a year earlier.

Aramco shares rose 0.3 percent to 23.98 riyals. The stock has fallen by about 14.5 percent this year, lagging behind its peers in the sector.

Adjusted net income fell 13.7 percent to $24.5 billion, exceeding the company's average analyst estimate of $23.7 billion.

Chief Financial Officer Ziad Al-Marshed told reporters that the company is currently seeking to free up cash tied up in relatively low-yielding assets in its portfolio and inject it into the company's core, higher-yielding investments.

The advisor declined to name these assets specifically, but said they are typically low-yielding assets linked to infrastructure.

Reuters reported last month that Aramco was close to a deal to raise around $10 billion from a group led by BlackRock and was considering selling up to five gas-fired power plants to raise up to $4 billion.

Total borrowing rose to $92.9 billion as of June 30, up from $74.4 billion a year earlier. The debt ratio increased to 6.5 percent, up from -0.3 percent a year earlier and 5.3 percent in the previous quarter.

The advisor said that Aramco is looking to issue debt in various regions, currencies, and instruments.

The company announced a total dividend distribution of $21.3 billion for the second quarter, including approximately $200 million in performance-related dividends .

* Dividends decline

In March, Aramco announced that it expected total dividends of $85.4 billion for 2025, a 31 percent decrease from its dividends of more than $124 billion the previous year.

The performance-related component is expected to decline 98 percent to $900 million as the company's free cash flow, which fell by about a fifth year-over-year in the second quarter to $15.2 billion, declines.

Aramco's dividends are a primary source of income for the Saudi government , which owns 81.5 percent of Aramco shares directly and another 16 percent through the Public Investment Fund, the kingdom's sovereign wealth fund.

Oil accounted for 62 percent of government revenues last year. The International Monetary Fund estimates that Saudi Arabia needs an oil price above $90 a barrel to balance its 2025 budget.

Aramco's average realized crude oil price was $66.7 per barrel in the second quarter, down from $76.3 in the first quarter and $85.7 in the second quarter of 2024.

"We expect Saudi Arabia to record a budget deficit of 5 percent of GDP this year," said James Swanston, an analyst at Capital Economics, adding that the government will likely exceed its annual borrowing plan.

This would be more than double the 2.3 percent deficit, or about $27 billion, that the kingdom projected in November for the 2025 budget.

(Prepared by Mahmoud Reda Murad, Noha Zakaria, and Mahmoud Salama for the Arabic Bulletin - Edited by Marwa Gharib)