AlJazira Capital starts coverage on drilling sector, sets ADES, Arabian Drilling ratings

AlJazira Capital initiated coverage on the Saudi drilling sector, setting its ratings for ADES Holding Co. and Arabian Drilling Co. (ADC).

For analyst estimates

For analyst estimates

The research firm explained that oil & gas relevance will continue over the coming decade, despite countries intending to switch to alternative energy sources. Rising population and the increasing energy per-capita intensity from emerging Asian economies like China, India and Indonesia to drive the oil & gas demand.

"Saudi Arabia's oil & gas production 1.8x times faster than global levels over 2022-2030. Saudi Arabia's drilling expenditure which is poised to grow from $3 billion to $4.9 billion by 2025, implying a 13% [compound annual growth rate (CAGR)] over 2021-2025," AlJazira Capital noted.

However, the recent chain of events impacting Saudi Aramco’s expansion plans could likely pose near term uncertainty. However, ADES would be less affected than Arabian Drilling.

AlJazira Capital initiated coverage on ADES and placed an "Overweight" rating on the stock, setting the target price (TP) at SAR 21.70 a share, supported by its healthy growth prospects in the medium to long term. This would come on the back of strong footing in an attractive offshore market and solid backlog.

"We expect the active rigs to increase from 67 in 2023 to 101 by 2028, which could drive a 14.1% revenue CAGR over 2023-2028 amid tighter offshore rig supply," the research house said.

"Furthermore, ADES expansion into new geographies provides the company flexibility to deploy all suspended rigs from Aramco outside Saudi Arabia by the end of 2024," it noted.

Meanwhile, the research firm assigned ADC a "Neutral" rating, setting the stock's TP at SAR 166.40 a share on its coverage initiation. This was attributed to the greater impact on ADC than ADES, despite the former's strong revenues driven by rig expansions.

"We prefer ADES over ADC due to efficient execution as evident from its faster scale-up over FY20-23, better revenue growth due to its higher skew to offshore drilling, thus making it a more premium player, and better net margin expansions, iv) the company’s diversified geographic exposure," AlJazira Capital noted.

AlJazira Capital expected ADES and ADC to post net earnings of SAR 772 million and SAR 557 million in 2024, respectively.