Middle Eastern Oil Services: time to switch horses (ADNOC Drilling downgraded to HOLD, Arabian Drilling upgraded to BUY)
We have downgraded ADNOC Drilling to HOLD (from Buy), with an updated price target (PT) of AED 5.61 (from AED 5.01); and upgraded Arabian Drilling to BUY (from Hold), with an updated PT of SAR 104.0 (from SAR 163.0). ADNOC Drilling was the star of 2024, while Arabian Drilling suffered from the fallout from Saudi Aramco’s cancelled expansion projects. Increased liquidity in ADNOC Drilling saw its index inclusion and new investors driving the share price performance. We expect 2025E to bring higher OPEC production and continued unconventional development in both Saudi Arabia and Abu Dhabi. We see margins a little lower than in 2024. While ADNOC Drilling is making an overseas deal, we do not view this as significant in the short term. We do not expect Arabian Drilling to follow suit, although it may see its suspended rigs used elsewhere. With lower capex, leverage for both companies should decline going forwards. We are forecasting average dividend yields 4.2% for ADNOC Drilling and 5.2% for Arabian Drilling in the next three years. The former is trading at our P/E for 2025E for 15.5x and the latter at 22.7x, compared to a peer median of 15.5x.
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