Investments In AI And Gas Expansion Will Increase Operational Efficiency By 2030

Key Takeaways

• Investment in AI and digital solutions enhances operational efficiencies, boosting net margins through reduced operating costs.
  
• Expansion in gas and downstream integration in Asia aims to stabilize returns, boosting earnings and cash flow.
  
• Market fluctuations, weak margins, and geopolitical risks could hinder Aramco's revenue consistency, growth projects, and new energy ventures.

Catalysts

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

• Saudi Aramco's investment in AI and digital solutions to optimize operations is expected to significantly enhance efficiencies, resulting in higher net margins due to reduced operating costs.
  
• The expansion of the gas program, targeting over 60% increase in sales gas production capacity by 2030, positions Aramco to generate attractive and stable returns, positively impacting overall earnings.
  
• Strategic investments in downstream integration and the growth of the liquid to chemical business in key Asian markets are anticipated to yield $8 to $10 billion in operating cash flow by 2030, bolstering revenue.
  
• Utilization of spare oil capacity and capturing additional market share as global demand rises could contribute to substantial incremental operating cash flow and increased revenue streams.
  
• Commitment to new energy development, including CCS hubs and solar investments, supports diversification and long-term growth, potentially enhancing future revenue and contributing to sustainability goals.

Saudi Arabian Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saudi Arabian Oil's revenue will decrease by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 24.3% in 3 years time.
• Analysts expect earnings to reach SAR 415.4 billion (and earnings per share of SAR 1.72) by about March 2028, up from SAR 393.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the SA Oil and Gas industry at 13.3x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.21%, as per the Simply Wall St company report.

Saudi Arabian Oil Future Earnings Per Share Growth

Risks

• Geopolitical uncertainties and volatility could pose risks to global oil inventory levels, impacting Aramco's ability to maintain consistent revenue streams.
  
• The company's heavy investment in growth projects and capital expenditure plans may be affected by external economic conditions, potentially impacting future earnings.
  
• Decline in oil prices and volumes negatively affecting upstream EBIT indicates sensitivity in revenue generation to market fluctuations.
  
• The downstream business reported negative EBIT due to weak margins and noncash items, which may continue to impact net margins if market conditions do not improve.
  
• The delay in the development of a market for blue ammonia and challenges in securing offtake agreements highlight potential risks in achieving targeted revenue growth from new energy projects.

Valuation

• The analysts have a consensus price target of SAR30.661 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 SAR35.0, and the most bearish reporting a price target of just SAR26.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SAR1707.8 billion, earnings will come to SAR415.4 billion, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 20.2%.
• Given the current share price of SAR26.6, the analyst price target of SAR30.66 is 13.2% 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.