AI Data Center Demand And Capacity Expansion Will Support Long Term Gas Earnings

Catalysts

About ADNOC Gas

ADNOC Gas is an integrated gas processing and LNG company that supplies domestic and export markets with natural gas and gas-derived products.

What are the underlying business or industry changes driving this perspective?

• Planned 30 percent capacity expansion by 2029 through MERAM, Rich Gas Development and Ruwais LNG positions ADNOC Gas to capture structurally rising regional and Asian gas demand, supporting sustained revenue growth and a targeted 40 percent increase in EBITDA by 2029.
• Robust domestic gas dynamics in the UAE and wider GCC, including population growth and increasing gas-to-electron demand, allow ADNOC Gas to grow higher margin domestic volumes and reprice incremental sales, which should structurally lift net margins and earnings resilience through cycles.
• New demand from AI data centers and digital infrastructure, both in the UAE and key export markets such as Japan, creates an additional long term baseload demand source for gas and LNG, underpinning higher utilization of existing and new assets and supporting top line growth and cash flow visibility.
• Ruwais LNG’s electrified, more efficient design and the roll out of AI and robotics enabled predictive maintenance across the asset base are expected to reduce operating and maintenance costs by hundreds of millions of dollars, directly enhancing EBITDA margins and free cash flow conversion.
• High return growth projects such as the phased Rich Gas Development, potential Bab Gas Cap and debottlenecking of existing infrastructure allow ADNOC Gas to add premium export and liquids volumes with mid teen unlevered returns, driving disproportionate upside to earnings and return on invested capital as these projects ramp.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ADNOC Gas's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.3% today to 21.5% in 3 years time.
• Analysts expect earnings to reach $5.3 billion (and earnings per share of $0.06) by about December 2028, down from $5.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $6.0 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 27.6x on those 2028 earnings, up from 13.5x today. This future PE is greater than the current PE for the AE Oil and Gas industry at 13.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The scheduled expiry of the domestic tax holiday in late 2027 could sharply increase the effective tax rate on the fastest growing and most profitable part of the business, which would reduce net profit growth and dilute net margins even if operational performance remains strong.
• The company is committing at least 20 billion US dollars of CapEx through 2029 and may lift this toward 27 billion to 28 billion US dollars if it proceeds with later Rich Gas Development phases and Bab Gas Cap. Any delays, cost overruns or failure to reach mid teen unlevered returns would pressure free cash flow, constrain dividend growth and weigh on earnings.
• Export oriented products such as naphtha, condensate, LPG and LNG remain highly exposed to oil and global gas benchmarks. A sustained period of weaker Brent or regional LNG prices relative to current assumptions would drag on export EBITDA and compress overall operating margins.
• New demand from AI data centers and digital infrastructure, both in the UAE and in key import markets like Japan, is still uncertain in scale and energy mix. If more of this demand is ultimately met by renewables rather than gas, the upside to ADNOC Gas volumes and long term revenue could be materially lower than implied.
• The Dolphin gas import contract from Qatar, which underpins regional gas supply dynamics and gas to electron arbitrage opportunities in the GCC, expires in 2032. Any adverse renegotiation or non renewal could tighten available molecules for ADNOC Gas, limiting domestic sales growth and putting pressure on margins and earnings resilience.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of AED4.14 for ADNOC Gas based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of AED5.0, and the most bearish reporting a price target of just AED3.9.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $24.5 billion, earnings will come to $5.3 billion, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 19.0%.
  
• Given the current share price of AED3.46, the analyst price target of AED4.14 is 16.5% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.