Should oil price and demand recover by 2022, Saudi Aramco could generate close to $100 billion in free cash flow (FCF) and a higher dividend, as the oil company is uniquely positioned to meet a potential resurgence of demand, according to BofA Global Research.
In a research report, BofA projects Aramco’s expected dividend per share to rise from 1.41 riyals ($0.37) in 2020 to 1.49 riyals in 2022. Meanwhile, BofA expects the oil giant to post a net income of $48.2 billion for 2020, a 45 percent drop compared to 2019.
Declining oil prices in 2020 led to an industry wide capex and production collapse. “The collapse left OPEC+ in general, and Saudi Aramco in particular, in control of the bulk of global oil spare capacity. At maximum sustainable capacity of 12 million bpd and proven ability to produce even more, Aramco is one of the few companies globally that can substantially boost output without committing additional capex,” the report said.
Brent price has recovered since the collapse last year. On Friday, it settled at $69.36 a barrel, its highest level since January 2020. For this analysis, BofA has assumed oil prices of $60-75/bbl and higher output scenarios.
While Aramco's output is likely to remain largely controlled by the OPEC+ agreement in 2021, the expiry of the OPEC+ agreement in 2022 and post-pandemic demand resurgence, could raise Aramco's production outlook substantially higher.
“We also estimate that under a $65/bbl and 11 million bpd production scenario, Aramco could come close to $100 billion of FCF generation. Given Kingdom of Saudi Arabia's (KSA) interest in additional cash dividends from Aramco, the shareholder outlays potentially could also be materially higher than the $75 billion minimum, in our view,” the report said.
BofA has left the price objective (PO) on Aramco unchanged at 35 riyals ($9.33) per share. Its rating on the stock remains on Neutral as it believes that, at current valuation, higher oil prices are largely priced in.
“At our PO, Aramco would trade at a valuation premium to most peers, which we think is justified given the outstanding fundamentals of the company.”
(Reporting by Brinda Darasha; editing by Daniel Luiz)
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