Equity Analysis /
Saudi Arabia

Saudi Aramco: Initiation – The seven wonders of the world's largest oil producer

  • Saudi Aramco – In a league of its own

  • Optionality – increase in MSC to 13.0 mmbpd by 2027f

  • Initiate coverage with Neutral rating and a PT of SAR38.5

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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Contributors
Talha Nazr
Nauman Khan
SNB Capital
27 June 2022
Published bySNB Capital

We initiate coverage on Saudi Aramco with a Neutral rating and a PT of SAR38.5. Saudi Aramco is the world’s largest oil producer and one of the most profitable companies in the world. Its production scale, operating efficiency, capex flexibility, and low gearing allow it to generate strong cash flows throughout the cycles. We expect the company to record a 2021-2026f earnings CAGR of 6.0%, which we believe will support a c13% increase in dividends to reach US$85bn by 2026f. The stock is trading at 2022f P/E of 14.2x vs the peers group average of 8.3x, which we believe is justified due to the sustainability of cash flows through different oil price cycles.

  • Saudi Aramco – In a league of its own: Saudi Aramco is the world’s largest oil producer, supplying one in every eight barrels of global crude in 2021 with a leading reserve life of c56 years (4x vs 5 major IOCs). This, along with one of the largest integrated downstream facilities and best-in-class operations, make it one of the most profitable companies globally and significantly ahead of its peers. The company’s EBITDA was 1.1x higher than the combined EBITDA levels of the 5 major IOCs when the average Brent price was US$71 in 2021 while it generated c0.84x of the combined EBITDA levels when Brent average was US$43 in 2020. Moreover, the sustainability of cash flow, due to capex flexibility and low gearing, allowed the company to sustain its dividends during various oil cycles which we believe is a key strength.

  • Growth and asset optimization: Complementing its leading position in oil markets, we believe the company has significant growth opportunities in the gas and downstream segments. Saudi Aramco is the sole supplier of gas in Saudi and is well-positioned to capture the growth potential through increasing its processing capacity by c38% to c25 bcfd by 2027f from 18.3 bcfd in 2021. Furthermore, SABIC acquisition is expected to further diversify its product offerings in the downstream segment while the asset monetization program is expected to enhance its capital structure toward higher growth and return investments.

  • Optionality – increase in MSC to 13.0 mmbpd by 2027f: Saudi Aramco’s spare capacity is its unique strength, enabling it to respond swiftly to market disruptions at minimal capex. To highlight, the spare capacity allowed it to generate additional revenue of US$35bn between 2013 and 2018. The company plans to increase its MSC gradually to 13.0 mmbpd by 2027f.

  • Initiate coverage with Neutral rating and a PT of SAR38.5: We initiate coverage on Saudi Aramco with a Neutral rating and a PT of SAR38.5. The stock is trading at 2022f P/E of 14.2x higher than the peer group average of 8.3x, which we believe reflects the sustainability of cash flows and dividends throughout oil price cycles.