Expansion Into Jordan, Kuwait, And Oman Will Diversify Operations And Strengthen International Presence

Key Takeaways

• Expansion of rig fleet and operational efficiency aims to support significant revenue growth and achieve targeted oil production goals.
  
• Regional expansion and focus on sustainability initiatives could diversify revenue streams and enhance operational efficiencies and margins.
  
• High capital expenditure and international expansion could strain cash flow, increase leverage, and introduce geopolitical risks, impacting revenue and net income.

Catalysts

Engages in the provision of drilling and construction services in in the United Arab Emirates.

• ADNOC Drilling's expansion of its rig fleet, including new hybrid rigs and significant increases in operational efficiency, is expected to drive continued revenue growth as the company supports ADNOC’s goal to achieve 5 million barrels of oil production per day.
  
• The strategic focus on unconventional resources, through Turnwell joint venture and efficient drilling programs, supports revenue growth with accelerated Phase 1 projects, leading to increased activity and potential higher earnings from unconventional plays.
  
• ADNOC Drilling's acquisition of Enersol and other companies enhances its technological capabilities and intellectual property portfolio, which could improve operational efficiencies and lead to higher future earnings margins.
  
• The company is targeting regional expansion beyond the UAE, including opportunities in Jordan, Kuwait, and Oman, which could diversify and grow its revenue base over the medium term.
  
• ADNOC Drilling’s emphasis on sustainability, through advanced energy-efficient rigs and decarbonization initiatives, could enhance operational efficiencies and net margins by reducing fuel consumption and emissions.

ADNOC Drilling Company P.J.S.C Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ADNOC Drilling Company P.J.S.C's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.4% today to 33.0% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $0.1) by about February 2028, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.9 billion in earnings, and the most bearish expecting $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.4x on those 2028 earnings, up from 19.7x today. This future PE is greater than the current PE for the AE Energy Services industry at 15.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.32%, as per the Simply Wall St company report.

ADNOC Drilling Company P.J.S.C Future Earnings Per Share Growth

Risks

• The introduction of a 9% income tax in January could pressure net margins, as evidenced by the $28 million tax reported in the third quarter.
  
• The multi-year, high capital expenditure program aimed at adding rigs and expanding operations internationally could strain free cash flow and increase financial leverage, potentially impacting earnings.
  
• Although current contract structures provide stability, the expansive growth plan relies on sustained favorable conditions and execution, risking potential deviations in expected revenue if market dynamics change.
  
• International expansion into markets like Kuwait and Oman might entail geopolitical and operational risks, potentially affecting revenue streams and net income.
  
• The aggressive acquisition strategy through Enersol, though strengthening technological capabilities, involves substantial capital deployment and integration risks that could affect the overall return on investment.

Valuation

• The analysts have a consensus price target of AED6.177 for ADNOC Drilling Company P.J.S.C based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of AED6.8, and the most bearish reporting a price target of just AED5.01.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.0 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 29.4x, assuming you use a discount rate of 21.3%.
  
• Given the current share price of AED5.58, the analyst price target of AED6.18 is 9.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.