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Energy stocks are on a roll. But this one has the balance sheet to beat them all, says Citi


Energy has been the best-performing sector by a long mile this year — and that’s despite a strong broad-based stock market rally so far in the second half. Even so, one energy stock stands out among its peers for its “strongest balance sheet” in the industry, according to Citi. “[Saudi] Aramco [in] 2Q produced a new quarterly record buoyed by exceptional margins across both its upstream and downstream portfolio. The world’s largest energy company continues to run unquestionably the strongest balance in the industry, giving support to both an expansive capital programme and potential for higher distributions back to shareholders,” Citi’s analysts, led by Alastair Syme, said on Aug. 15. The oil giant had a record second quarter, as it delivered net income of $48.4 billion, up from $25.5 billion a year earlier — handily beating analysts’ consensus estimate of $46.2 billion. “Our record second-quarter results reflect increasing demand for our products — particularly as a low-cost producer with one of the lowest upstream carbon intensities in the industry,” said Saudi Aramco’s president and CEO Amin Nasser in the company’s earnings report . For the half year ended June, the company achieved net income of $87.9 billion, up from $47.2 billion in the same period a year ago. Saudi Aramco’s blowout results easily eclipsed that of its major listed peers, such as ExxonMobil , BP and Chevron — all of which posted strong second-quarter results. Oil companies have benefited from soaring crude prices, which briefly surged above $130 a barrel earlier this year but have since come off their highs to trade at below $100 a barrel currently. Strongest balance sheet Citi’s analysts said that Saudi Aramco will raise capital expenditure over the coming years to drive “unchanged growth ambitions” in oil, gas and chemicals, which will be well supported by its strong balance sheet. “The balance sheet (0.1x net debt/trailing CFFO) provides flexibility to support these spending plans, even in a lower macro,” Syme said. The net debt/trailing cash flow from operations ratio measures the ability of a company to pay off its debt using cash flow from its operations. A lower ratio indicates that a company is better positioned to service its debts from its cash flow. The industry’s average ratio is 0.37, according to FactSet. Read more JPMorgan says the growth stocks rally has further to go — and explains when it will likely end ‘Don’t be a hero’: Investment pro reveals how to play the market, names the stocks she’s buying How to reduce risk in your portfolio right now, according to the pros Shares of Saudi Aramco are up around 23.4% this year on the Saudi Stock Exchange. Citi has a price target of 42 Saudi riyal ($11.20) on the stock, which closed at 39.2 Saudi Riyal on Aug. 21, representing a potential upside of 7%. With the limited upside, it is perhaps no wonder that Citi’s analysts warned that the stock looks expensive relative to its peers. “To the extent that valuation matters in the oil sector – and there is not strong empirical evidence that in the current market it does – the challenge remains that Aramco is an expensive equity within the context of the global oil group on most metrics,” Syme said. “That said, few companies in the global oil space offer investors long term portfolio visibility alongside clear ambitions to grow its business across the value chain,” he added. It was reported earlier this year that the company was considering the sale of more shares, in what would be its largest sale ever, on the Saudi Tadawul as well as a secondary listing in London or Singapore.

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