Long-Term Shipping Contracts And Tight Vessel Supply Will Support Durable Future Cash Flows

Catalysts

About ADNOC Logistics & Services

ADNOC Logistics & Services is a global energy maritime logistics company providing integrated offshore logistics, shipping and port services that support ADNOC and a diversified international customer base.

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

• Ramp up of long-term gas and chemicals shipping contracts, including new LNG, ethane and ammonia carriers and the TA’ZIZ chemicals export port, is set to lock in higher contracted volumes and day rates well into the 2030s and 2040s, supporting durable revenue growth and more predictable EBITDA.
• Structural tightness in VLCC, product tanker and offshore support vessel supply, alongside growing seaborne crude and product flows from OPEC and new export hubs, should sustain elevated charter and day rates beyond current guidance, driving upside to Shipping and Integrated Logistics revenues and segment margins.
• Execution of the multiyear newbuild and fleet renewal program, combined with AI driven vessel deployment and recurring value efficiency savings from 2026, is expected to lower unit OpEx and improve fuel efficiency, expanding EBITDA margins and supporting faster earnings growth than headline revenue.
• High visibility on forward contracted revenues, with over 65% of revenue through 2030 already secured and infragrade contracts extending to 2048, provides a platform for disciplined deployment of the remaining multibillion dollar growth CapEx, which should compound free cash flow and support rising dividends and earnings per share.
• Increasing free float, potential index inclusion and the shift to higher, quarterly dividends are likely to broaden the global investor base and narrow any valuation discount to cash flow and contracted backlog, which would improve the company’s cost of capital and enhance net income accretion from future growth projects.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ADNOC Logistics & Services's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.3% today to 20.7% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $0.14) by about December 2028, up from $794.5 million today. The analysts are largely in agreement about this estimate.
• 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 21.8x on those 2028 earnings, up from 14.8x today. This future PE is greater than the current PE for the AE Oil and Gas industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for 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?

• ADNOC Logistics & Services is investing approximately $7 billion in CapEx through 2028 with a further $3 billion of growth projects in the pipeline. If vessel acquisitions, M&A or EPC projects deliver lower than targeted high single digit to low double digit unlevered IRRs, the company could face value destructive capital allocation that weighs on future earnings growth and ultimately compresses net margins.
• The strategy is tightly bound to ADNOC and regional NOCs, with over 65% of revenue through 2030 contracted and around $20 billion of the $25 billion backlog tied to ADNOC Group. Any slowdown in ADNOC’s upstream and downstream expansion plans, changes to OPEC or OPEC+ production policies, or a prolonged period of lower oil and gas prices could reduce offshore activity and volumes, undermining revenue visibility and Integrated Logistics EBITDA.
• Shipping profitability is currently underpinned by structurally tight VLCC and product tanker markets plus elevated TCE rates. Management acknowledges that rates are below late 2023 peaks and are sensitive to short term cycles and geopolitics, so a normalization in tanker and gas carrier day rates or an increase in fleet supply could erode segment EBITDA margins and stall net profit growth despite record current performance.
• The business model increasingly relies on long term shipping and gas contracts running out to 2048 at high EBITDA margins of around 75% to 80%. Shifts in environmental regulation, decarbonization technologies, alternative fuels and trade flows over the next two decades could make parts of the fleet less competitive or require additional unplanned CapEx, pressuring both revenue resilience and operating margins.
• Recent growth has been boosted by one off factors such as Navig8 acquisition synergies, vessel disposal gains and specific EPC projects like G Island that were guided at 7% to 8% margins. As these roll off while depreciation from newbuilds and acquisitions rises and recurring value efficiencies of about $65 million per year mature, there is a risk that reported net profit and earnings per share grow more slowly than implied by current momentum.

Valuation

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

• The analysts have a consensus price target of AED6.76 for ADNOC Logistics & Services 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 AED7.6, and the most bearish reporting a price target of just AED6.15.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 19.0%.
  
• Given the current share price of AED5.83, the analyst price target of AED6.76 is 13.7% higher.
  
• 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.