International Expansion And MENA Diversification Will Unlock Strong Rig Potential

Key Takeaways

• Expanding international presence and diversification beyond Saudi Arabia reduce reliance on a single client and position for long-term regional growth in drilling demand.
  
• Cost optimization, focus on unconventional rigs, and solid contract renewals strengthen margins, recurring revenue, and earnings stability despite short-term rig suspensions.
  
• Prolonged rig suspensions, offshore declines, and cost-cutting measures heighten earnings risk, asset impairments, and investor uncertainty amid unclear fleet utilization and muted contract prospects.

Catalysts

Operates as an onshore and offshore gas and oil rig drilling company in Saudi Arabia.

• The company's backlog reached a record SAR 11 billion with a recent SAR 2.4 billion addition, indicating strong forward contract visibility despite current rig suspensions; as suspended rigs are historically called back into operation and backlog revenue is not destroyed but deferred, this enhances medium-term revenue and earnings prospects once activity normalizes.
  
• Arabian Drilling is executing its first international contract and has opened a Sharjah office, marking initial steps in long-awaited geographical diversification beyond Saudi Arabia; this reduces dependence on Saudi Aramco and positions the company to capture drilling demand from energy security initiatives and underinvestment in oil supply across the broader MENA region, which could drive longer-term revenue growth and higher utilization rates.
  
• Ongoing cost optimization (notably, permanent SG&A reductions and workforce downsizing) and lower CapEx guidance are creating a leaner operating structure that will significantly expand net margins and free cash flow when suspended rigs or new contracts return to service, as incremental revenue is expected to broadly flow through to profitability.
  
• The shift toward unconventional land rigs, which are fully operational and generating sustainable annual revenues (~SAR 400 million), taps into growing regional gas development needs; continued expansion in this area exposes Arabian Drilling to premium day rates and multi-year contract opportunities, supporting both recurring revenue and blended margin improvements.
  
• Industry-wide contract tenures are increasing and technology adoption (digitalization and automation) is accelerating demand for efficient, high-spec rigs; Arabian Drilling's diversified fleet and contract renewals at solid day rates (particularly onshore) position it to benefit from these positive structural trends, enhancing revenue and stabilizing long-term margins.

Arabian Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arabian Drilling's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 17.4% in 3 years time.
• Analysts expect earnings to reach SAR 713.2 million (and earnings per share of SAR 5.92) by about August 2028, up from SAR 237.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 27.7x today. This future PE is lower than the current PE for the SA Energy Services industry at 24.2x.
• 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 20.76%, as per the Simply Wall St company report.

Arabian Drilling Future Earnings Per Share Growth

Risks

• Ongoing suspensions of rigs, particularly by Saudi Aramco, have created significant uncertainty in fleet utilization; since late May 2024, no suspended rigs have been reactivated, and management cannot provide a clear outlook for normalization, directly threatening revenue visibility and potentially depressing topline revenue and net profitability.
  
• Increased concentration of revenue in the land rig segment following a 43% year-on-year revenue drop in offshore, exposes Arabian Drilling to heightened risk if land demand falters or more land rigs are suspended, harming revenue diversification, gross margins, and overall earnings stability.
  
• The company's planned cost-cutting initiatives-including workforce downsizing and SG&A reduction-reflect structural adjustments to weaker activity levels, but substantial ongoing reductions risk undermining future operating leverage and may not be sufficient if utilization remains low, keeping EBITDA margins and net income under pressure.
  
• Uncertainty surrounding the renewal of remaining rig contracts and return of leased offshore rigs raises the prospect of further revenue loss and potential future asset impairments, which could intensify declines in both reported earnings and asset values, amplifying downside risk to net margins.
  
• The Board's suspension of dividends for 2025, in response to lower utilization and profitability, may signal prolonged weakness in cash generation and could reduce investor confidence, especially if international expansion efforts do not deliver new contract wins quickly enough to offset domestic headwinds, thereby constraining free cash flow and pressuring share price.

Valuation

• The analysts have a consensus price target of SAR90.627 for Arabian Drilling 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 SAR118.0, and the most bearish reporting a price target of just SAR63.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SAR4.1 billion, earnings will come to SAR713.2 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 20.8%.
• Given the current share price of SAR74.05, the analyst price target of SAR90.63 is 18.3% 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.