Decisive Growth In LNG And Renewables To Propel Future Earnings And Optimize Margins

Key Takeaways

• Strategic gas and LNG expansion plans, together with increased Downstream investments, are aimed at boosting revenue and capturing more value in the growing global gas market.
  
• Capital projects and a focus on renewables and strategic debt optimization align with Aramco’s goals for long-term growth, resource efficiency, and net-zero targets.
  
• Aramco's reliance on high oil prices and capital expenditures may strain cash flow and revenue, especially as downstream losses and LNG strategy uncertainties persist.

Catalysts

Operates as an integrated energy and chemical company in the Kingdom of Saudi Arabia and internationally.

• Saudi Aramco's strategic plans to increase gas and LNG production, including the Jafurah gas project and international LNG expansion, could enhance future revenue as these segments grow in response to rising global gas demand.
  
• The company's ongoing investments in Downstream integration and liquids-to-chemicals conversion aim to balance its product portfolio, potentially improving net margins by capturing incremental value down the hydrocarbon value chain.
  
• Extensive capital projects coming online, such as S-OIL expansion, Huajin Aramco petrochemicals, and SATORP, are expected to drive significant revenue growth while optimizing resource utilization through integration with existing operations.
  
• Aramco's focused renewables strategy, which links solar PV developments to long-term capacity targets, may provide cost savings and enhance earnings by utilizing renewable credits to meet net-zero targets by 2050.
  
• The optimization of Aramco's capital structure through strategic debt issuance and portfolio management, like the SABIC divestiture, sets a foundation for improved future earnings by prioritizing high-return and high-growth opportunities.

Saudi Arabian Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saudi Arabian Oil's revenue will decrease by -2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.4% today to 26.1% in 3 years time.
• Analysts expect earnings to reach SAR 437.3 billion (and earnings per share of SAR 1.81) by about November 2027, up from SAR 410.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SAR 485.0 billion in earnings, and the most bearish expecting SAR 381.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.7x on those 2027 earnings, up from 16.5x today. This future PE is greater than the current PE for the SA Oil and Gas industry at 10.9x.
• 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 20.09%, as per the Simply Wall St company report.

Saudi Arabian Oil Future Earnings Per Share Growth

Risks

• Despite robust net income, Saudi Aramco's downstream segment has recorded losses, primarily due to weak refining and chemical margins, negatively impacting overall net margins.
  
• Capital expenditure is set to increase, with 2025 expected to be higher than 2024, which could strain cash flow, especially if oil prices remain low, affecting earnings and free cash flow.
  
• There are ongoing costs related to substantial assets under construction ($90 billion), which are yet to generate returns, potentially affecting return on average capital employed (ROACE) in the short term.
  
• The reliance on continued high oil demand and prices is critical; any dip in these could further strain Aramco’s revenue and net income, especially given their current debt increase and capital expenditure commitments.
  
• The company faces uncertainties in executing its LNG growth strategy without secured offtake agreements, which could impact the expected revenue and diversification from the new energy sector.

Valuation

• The analysts have a consensus price target of SAR 32.05 for Saudi Arabian Oil 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 SAR 37.0, and the most bearish reporting a price target of just SAR 28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SAR 1677.5 billion, earnings will come to SAR 437.3 billion, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 20.1%.
  
• Given the current share price of SAR 28.0, the analyst's price target of SAR 32.05 is 12.6% 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.