Aramco's delay of increasing production capacity to affect drilling firms' earnings: S&P

Aramco’s oil tanks

S&P Global Ratings Agency expected the slowdown in capital spending growth for oil companies in the GCC region and Saudi Aramco's pause of plans to increase its maximum production capacity will lead to a decrease in demand for drilling rigs, usage rates, and average daily rates.
 
This will affect the earnings of such companies in Saudi Arabia and the neighboring countries, the agency noted. 
 
It expects the total spending of national oil companies in the region to slow as of 2024 compared to the previous two years, as spending will remain high at nearly $110 billion and up to $115 billion between 2024 and 2026. Although these figures are still large, they represent a stage of stability after years of continuous growth.
 
The national oil companies in the region are expected to take a broadly cautious approach to spending, with total capital expenditures increasing modestly by about 5% on average in 2024, compared to 2023.
 
The pause of Aramco's plans to increase its maximum production capacity will impact demand for offshore platforms. The slowdown in oil companies’ investments will impact utilization ratios, average day rates, and the profitability of the region's drillers, S&P Global added.
 
The delay of Aramco's plans to increase its maximum production capacity is expected to lead to annual losses of 15% to 20% in offshore platforms, equivalent to 15 platforms annually. The stacking costs of offshore drilling platforms are estimated to range between $15,000 and $25,000 per day.
 
Considering the market shares of drilling companies listed in the Saudi market, it is expected that their profits before interest, taxes, depreciation, and amortization (EBITDA) will drop by 20% annually.
 
S&P Global added that GCC drillers have sufficient resilience to face these challenges, noting that it does not expect the credit ratings of these companies to be affected in the short term.
 
It pointed out that this might lead some drillers to expand and diversify their customer base and geographic presence, although this may pose other challenges.

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