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Saudi oil giant Aramco will benefit from the oil prices and demand recovery according to Bank of America Merrill Lynch (BoAML).
“We believe that Aramco is uniquely positioned in the global oil world to meet potential resurgence of oil demand. Should bullish oil price demand assumptions materialize, we would expect Aramco to generate close to $100 billion in free cash flow in 2022,” BoAML said in a report.
The bank said, the company can go beyond its commitment of paying $75 billion dividend. We believe that dividend upside is also possible at higher oil prices/output given Aramco’s stellar cash flow generation.
Higher dividend
Oil last week crossed $65/bbl as market tightened. In 2020 the oil market experienced the perfect storm of collapsing demand amid a Saudi Russian price war. Yet, this year oil has staged a remarkable recovery as Brent prices crossed $65/bbl in February.
Saudi Arabia, the world’s largest crude exporter, is benefiting as oil rebounds from last year’s slump amid OPEC+ production limits and signs of a global economic recovery. Brent, a benchmark for more than half the world’s oil, jumped 4.9 per cent last week to $69.36 a barrel as of Friday, its highest close in almost two years.
“Our scenario analysis suggests Aramco would be well placed to implement higher dividend distribution guidance beyond its $75 billion minimum. We concurrently increase our oil price for 2020 to $60/bbl and adjust our 2020 estimates to reflect the new oil price forecast.
Control of spare capacity
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.
“We expect Aramco’s output to remain largely controlled by the OPEC+ agreement in 2021. However, taking into account the expiry of the OPEC+ agreement in 2022 and post-pandemic demand resurgence, Aramco’s production outlook could be substantially higher,” BoAML said
The bank estimates that under a $65/bbl and 11million bpd production scenario, Aramco could come close to $100 billion of cash flow 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 $75bln minimum, in our view,” the bank said.
