Saudi Aramco's recently published data suggests potential for growth upside, and for stronger sovereign fiscal and foreign asset positions, says a BofA Merrill Lynch Global Research report.
The report by BofA Merrill Lynch Global Research's Mena Economist Jean-Michel Saliba says it now estimates the Saudi government fiscal breakeven oil price could be overestimated by about $7/barrel and lies closer to $88/barrel.
The data greatly enhances the understanding of Saudi macro, hydrocarbon and financial dynamics, says the report.
Saudi Aramco's chemicals expansion could lower the fiscal breakeven oil price by making earnings less correlated to oil prices going forward. Saudi Aramco's stock of liquid foreign assets could provide additional comfort to the Saudi-USD peg anchor, the report says.
Mega-projects funded partly through the Saudi Aramco-Sabic-PIF deal provide growth upside from 2020 onwards, and could impact positively on medium-term employment trends.
"We do not believe the acquisition of Sabic by Aramco provides a disincentive for authorities to proceed with domestic energy pricing reform. This would be key to signal reform commitment at a time when sovereign euro bond maturities are approaching," the report says.
Equity strategy
Saudi Aramco's potential IPO and subsequent inclusion in the MSCI EM Index could significantly impact Saudi's weighting in the index; potentially taking it up to 4.6%. This would make it the 7th largest member of the index. Saudi's EM inclusion is now half-complete. Although the report expects at least $6.5 billion of MSCI related passive inflows in August, relatively rich market valuations, tepid earnings growth and growing earnings headwinds are likely to dampen near-term interest of active fund managers.
Chemicals: neutral impact on SABIC equity, global industry
The report views the Aramco-Sabic-PIF deal as neutral for Sabic equity valuation at this juncture given the transaction is a change in ownership between two government entities. However, the acquisition could result in a significant increase in Sabic's tax rate which could affect its future earnings.
"We do not expect Aramco's acquisition of Sabic to have a major impact on the global chemical landscape as Aramco on a standalone basis (ex-Sabic stake) remains a relatively small player versus its upstream market share," it said.
The report notes that planned mega-projects could add up to about 2ppt to real non-oil GDP growth in the medium-term. The possible finalization of the Saudi Aramco-Sabic-PIF deal could unlock $69.1bn of financing to the PIF and this could support a first phase of mega-projects.
Authorities suggest the transaction would close in 2020, implying the growth impact of PIF's off-budget capital spending could start to be felt next year, the report adds.
