Bank of America confirms recommendation to buy Aramco shares with a target price of 37.5 riyals

Bank of America research confirmed its recommendation to buy the shares of energy giant Saudi Aramco with a target price of 37.5 riyals per share after the company announced its business results for the second quarter of 2024.

The company’s shares were traded on the Saudi stock market near 28 riyals during Monday’s session.

The global investment bank’s research said in a research note that Aramco’s net profits in the second quarter of this year, amounting to $29.1 billion, exceeded its expectations and the average market consensus by five percent.

It added that Aramco’s low cost per barrel of oil, in addition to its possession of the highest proven reserves at the upstream level in the world, puts it in a unique position among its peers from global energy companies.

Bank of America Research said its commodity team expects Brent crude to average around $86 per barrel in 2024.

It added that the risks that could push Aramco’s target price down include the company’s higher-than-expected capital spending, increased geopolitical tensions in the Middle East, the company paying a lower-than-expected dividend, and lower-than-expected oil demand.

According to the research note, the possibilities that could push the target price up include a faster-than-expected recovery in the global economy and global oil consumption, increased supply disruptions that would require increased Saudi oil production, higher oil prices, and a significant increase in dividends due to a favorable macroeconomic environment.

She added that it came out with three main axes after the company’s conference call with analysts on the occasion of its business results, the first of which is that the company’s growth plans are on track, whether in upstream or downstream activities, the second is that demand for oil in the second half of 2024 will be supported by the recovery of air travel and demand from China, and the third axis is that the company is prepared to be a major participant in the blue hydrogen sector.

Bank of America research added that following the release of the company’s business results for the second quarter, it made slight adjustments to its expectations for expected earnings per share between 2024 and 2027, describing the dividend yield per share in 2024 as attractive at 7.2%.

Saudi Aramco announced the distribution of basic dividends worth 76.1 billion riyals and a fifth performance-related dividend worth 40.4 billion riyals, which will be paid in the third quarter, with total profits of 116.5 billion riyals for the second quarter of the year. Aramco said it expects to announce a “leading” dividend of SAR 465.9 billion in 2024.

Bank of America Research said that Aramco confirmed during the conference its guidance for capital spending for 2024 as a whole in the range of $48 billion to $58 billion, while spending in the first half of the year amounted to $24.2 billion.

It added that upstream liquids development projects are on track, explaining that Aramco expects to complete the Dammam field development project in the second half of 2024, the Marjan and Berri fields by 2025, and the Zuluf field by 2026.

It stated that Aramco expects to start operating the first phase of the Jafurah unconventional gas project in the third quarter of 2025, and that 16 contracts have been awarded for the second phase of the project, worth $12.4 billion.

The memo said that Aramco expects to have about 300 drilling rigs by the end of the year, with growth mainly coming from gas activities. On the other hand, the note indicated that Aramco adopts a positive outlook towards oil demand growth in the second half of 2024.

It added that global oil demand averaged 103.2 million barrels per day in the first half of 2024, growing by 1.1 million barrels per day on an annual basis.

It said that based on multiple forecasts from industry consultants, Aramco indicated that demand expectations in the second half of the year range between 104.6 million barrels per day and 106.2 million barrels per day, driven by the recovery of air travel and Chinese demand.

It said that this indicates that oil demand growth in 2024 will be in the range of 0.8 million barrels per day to 1.6 million barrels per day, compared to Bank of America’s expectations of growth of 1.5 million barrels per day. It added that inventories, on the other hand, remain at the lower end of the five-year range.

In the same context, Bank of America said that Aramco confirmed its goal to produce up to 11 million tons of blue ammonia, 1.8 million tons of blue hydrogen, annually by 2030.

But the note said that Aramco highlighted that the large-scale investments it is making on its part will be guided by how the actual demand for hydrogen unfolds and the premiums paid by customers.

Aramco also pointed to some challenges, including the high cost of hydrogen production and transportation, infrastructure development and policy clarity.