Middle Eastern Oil Services: we’re going with what’s growing (ADNOC Drilling upgraded to BUY, Arabian Drilling downgraded to HOLD)

We have upgraded ADNOC Drilling to BUY (from Hold), with an updated price target (PT) of AED 5.01 (from AED 3.44), and downgraded Arabian Drilling to HOLD (from Buy), with an updated PT of SAR 163.0 (from SAR 168.3). Recently, Saudi Aramco cancelled its expansion, costing Arabian Drilling three offshore rigs, and it is maintaining iron discipline in oil production. In contrast, Abu Dhabi’s expansion continues. Regional expansion is on the cards, with Arabian Drilling already prequalified for the Kuwaiti market. The dash for gas is ongoing in both countries, although the shale projects in the Kingdom of Saudi Arabia (KSA) are further developed than their counterparts in Abu Dhabi. Of the two we see ADNOC Drilling as generating higher margins and better returns. We are forecasting 4-6% dividend yields from both companies, but ADNOC Drilling may revise this upwards, due to cash flow. We see ADNOC Drilling trading at 15.2x P/E for 2024E and Arabian Drilling at 16.5x, compared to a peer median of 16.6x.