Saudi Aramco

Cenomi Retail reported a weak set of Q3 23 results with net losses of SAR203mn vs net profits of SAR22.1 and in Q3 22. Sipchem announced the start of the trial operations of Inochem (30% owned by Sipchem) . • NADEC signed an MoU with Del Monte Saudi...

PLD significantly improve 2023f and 2024f dividend yield. Q2 23 overview – lower prices impacted profitability. Remain Neutral with a PT of SAR34.1 .

With its Vision 2030 plan, Saudi Arabia is attempting to move away from economic dependence on hydrocarbons. Most of Saudi Arabia’s wealth is derived from its vast petroleum reserves, and the risk of these assets becoming stranded is existential. Efforts are underway to make the country a powerhouse in green energy, mining, logistics and infrastructure.

Positive outlook priced in, downgrade to Neutral. More feedstock, positive impact. Additional RCO allocation of 5,000 bpd.

Expanding upstream. Focus on downstream. Net income to reach SAR511bn in 2023f.

Jafurah, the next leg of growth. Another offshore rig. Net income to reach SAR638mn in 2023f.

We shine a light on the EM Energy sector, where companies such as Aramco are generating record profits. Analysing 36 metrics, we benchmark leading EM energy firms against their developed market peers. Top scorers: Saudi Aramco, Brazil’s Petrobras. We...

Favourable industrial programs support demand for pipes. Well established contract pipeline supports revenue. Strong operating efficiencies to bring in shareholder returns.

SABIC reported a better-than-expected set of Q2 22 results, with a net income increasing by 3.8% yoy (+22.5% qoq) to SAR7.93bn. We believe, the growth in earnings and variance was due 1) higher than expected revenues 2) higher gross profits despite higher feedstock costs 3) higher share of profits from JV’s and associates. This was partially offset by higher-than-expected selling and distribution expenses. Adjusting for non-recurring items, Q2 22 net income would be SAR7.57bn. The average sales prices were up 4% qoq while volumes remained flat qoq. Agri-nutrients revenues increased to SAR5.69bn, up 41% qoq, and is significantly higher than our estimates of SAR4.20bn.

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 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. 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. 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.

Following the highly successful USD6 billion initial privatisation of Dubai Electricity and Water Authority in April, which was sharply increased from 6.5% to 18% of the firm's share capital after the offering was 35 times subscribed, there has been another clear success in the region with further potentially sizeable supply under consideration. Against a background of stock market appreciation, more MENA equity supply is reportedly being prepared. He highlighted that this yield saving had enabled Austria to issue at a yield below Austria's bond "maturing in 2040, despite…being nine years longer".

Direction in some key markers has been lacking, with the USD struggling for direction, as is gold and some other minerals. The acceleration in inflation comes as the country prepares for the impact of Russia’s invasion of Ukraine on commodity prices and likely makes an interest rate hike this month more probable as risks to the inflation outlook are tilted to the upside. Additional support has stemmed from an elevated level of international reserves, which will help the currency during periods of global volatility, as we are seeing now. Venezuela, which was once a global oil giant, has the scope to add up to 1.

ICE Brent soared to above US$130/bbl in the morning session today after the US and Europe were reported to be discussing plans to restrict crude oil imports from Russia to further tighten economic sanctions against the country. Saudi Aramco has increased its oil price for all buyers for April delivery as the physical market tightens and demand for its oil increases. Managed money net longs in ICE Brent increased by 18,047 lots last week with speculators building fresh longs of 13,678 lots and trimming shorts by 4,369 lots.

Oil has caught a strong bid this morning as the conflict between Russia and Ukraine is intensifying. With this latest action, the West will be forced to seriously consider new sanctions on Russia, which could, of course, see oil prices spike even higher. Treasury said in its report that Kenya’s external public debt stock increased from $34.7bn at the end of December 2020 to $36.9bn at the end of 2021, marking an increase in external debt of just over 6%. As mentioned in recent commentary and flagged by international credit rating agencies, fiscal risks in Kenya have risen significantly during the Covid-19 era.

Since the initial market reaction to the discovery of the Omicron variant, oil has rallied over 35% and is trading at highs not seen since 2014 as it makes its way towards $100 per barrel. Global oil supply remains constrained even though OPEC+ has continued to unwind the deep output cuts introduced during the onset of the pandemic. US shale production, meanwhile, has been picking up but not at a rate that could significantly alter current market dynamics, yet. Now, however, it is looking likely that they could kick into a higher gear.

In one of the shortest OPEC+ ministerial meetings in recent memory, the cartel and its allies announced that they would be sticking to their initial plans to keep raising output by 400k barrels a day through November. Some market watchers had suggested that a boost of as much as 800k barrels could have been announced. Oil demand is set to continue to benefit from gas-to-oil switching as the northern hemisphere approaches its winter months, given how frothy natural gas prices currently are. At the same time, US oil production is floundering following the damage done by Hurricane Ida.

The oil price rebound is reflected in Saudi Arabia’s sovereign rating update. The rating is supported by Saudi Arabia’s assets, including the Public Investment Fund (PIF), the main sovereign wealth fund, with assets equivalent to close to USD400 billion, and the central bank’s reserves, which stood at USD441 billion at the end of 2020. Although a higher deficit might weaken the rating, the outlook for an economy that is less vulnerable to oil price volatilities is balancing risks again. The former attaches a Negative outlook, and the latter agency has a Stable outlook to its rating.

Emerging market supply revived this week, involving a strongly-received USD8 billion package for Saudi Aramco, a two-part liability management sale by Mexico and China placing EUR4 billion including negative-yielding five year bonds: Uzbekistan also is marketing dollar debt. Media sources attributed the financing to funding the firm's dividend commitments, described by Reuters as worth USD37.5 billion in H2 2020. Fisterra borrowed through its Tierra Mojada unit to raise an upsized USD953 million of 20-year bonds, increased from USD920 million, with pricing set at 5.75% versus low 6% area guidance.

We maintain our Overweight rating on Mouwasat with a revised PT of SAR149.1. A healthy balance sheet, favourable client mix and strong expansion pipeline are the stock’s key strengths. The stock is trading at an attractive 2021f PE of 24.9x vs its peer group average of 25.7x which we believe is not justified. New hospitals to operate in 2021f: Two new expansions are expected to come online in 2021f: Dammam (200 beds) and Madinah (200 beds). We believe the shift in the Eastern region would be a risk for Mouwasat, in our view as Saudi Aramco represents c15% of Mouwasat’s revenues.

MSCI announced the outcome of the August 2020 Quarterly Index Review (SAIR), with changes for Saudi indices to be implemented on the closing prices of 31 August 2020. Besides, there were no additions or deletions on the standard Index. Also for the MSCI Saudi Arabia Small Cap Index, there were no addition or deletions. From ATDV an perspective, this represent inflows equivalent to 3 days of ADVT based on average trading volumes of last 3 months.

Regime risk still low: opposition from disenfranchised royals, not mass population or the US (key external partner). Economic reform (non-oil growth) needs political change (slow elite consensus to faster decisions): both come with risk. 1a) Ahmed bin Abdulaziz(aged 78): Ahmed isKing Salman's younger and last surviving full brother. For those who contend that his path to the throne is more secure during the lifetime of his father, ie in the event a healthy King Salman (aged 84) abdicates, then it is worth noting that King reportedly attended official duties as recently as last week (meeting with the UK foreign minister and attending a cabinet meeting, according to the Saudi Press Agency).

The US remains supreme military force globally on all conventional measures. In the last three years the gap between US annual military expenditure and that of China, the number two global spender, has stopped narrowing. Equally importantly, plausible deniability also allows larger global powers (eg the US in response to the Saudi Aramco attack) to avoid counteraction when they do not see sufficient self-interest.

We expect 2020 to be a more positive year for the Saudi economy,with stronger growth driven by the non-oil sector as a result of progress on the Vision Realisation Programs (VRPs) and the domestic investment of the proceeds of the Saudi Aramco IPO. OPEC+ aiming to create equilibrium between oil supply and demand should ensure stability for government oil revenues in 2020. We do not envisage any new taxes in 2020. The earnings growth will be driven by the Banking, Telecom, Consumers and Healthcare sectors. Based on our earnings expectation and fair PE range, we believe the fair value of TASI is in the range of 8,400 to 8,900 points in 2020f.

Investors are transfixed by the scale of this week’s Aramco IPO.Saudi’s oil major is issuing 1.5% of its shares at a valuation range of US$1.6tn-1.7tn. Aramco would have a larger market capitalisation than Apple, Microsoft, Alphabet or Amazon. Over the past two years, though, some of these restrictions have been lifted. At just 12x EV/EBITDA, the stock is excellent value for a growth stock with steady cash flow and an untapped market. Investors have been excited by Aramco’s listing, but the real jewel could be the looming consumer boom.

This week's release of the Saudi Aramco IPO prospectus confirms the staggering scale of the company and the offering. If one imposes the peer group PE multiple (16x) on possible FY20 earnings of US$100bn, Aramco would be valued at US$1.6 trillion. On a cashflow from operations (CFO) basis, the peer group average is 8x. We consider a dividend yield of 5% for oil majors. Aramco has pledged a dividend of US$75 billion for the first five years. This may be below the US$2 trillion valuation that the Saudis seem to aspire to. 2) How will the IPO impact commodity prices? Among non-rated companies, INDF IJ and CPIN IJ still look promising.