Global Renewable Shifts And Regulations Will Undermine Oil Rig Margins

Key Takeaways

• Shift to renewables and tightening environmental rules threaten core revenues, while heavy dependence on a few key clients heightens earnings and cash flow volatility.
  
• Intensifying competition and escalating compliance costs erode margins, restrict cash generation, and elevate financial risk amid uncertainty over contract renewals and geographic expansion.
  
• Strong backlog, contract renewals, cost reductions, and regional expansion position Arabian Drilling for stable revenue, improved margins, and greater resilience against demand volatility.

Catalysts

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

• The accelerating global shift towards renewable energy and the adoption of stricter decarbonization policies are likely to structurally reduce demand for oil and gas, directly shrinking Arabian Drilling's long-term revenue base and putting pressure on day rates and utilization for its rigs.
  
• Increased regulatory pressures, evolving carbon taxes, and rising environmental compliance costs will likely raise operating expenses across drilling operations, leading to sustained margin compression and reduced profitability over time.
  
• Heavy reliance on a small number of key customers, especially Saudi Aramco, exposes Arabian Drilling to significant concentration risk-as seen from ongoing rig suspensions and uncertain contract renewals, which can lead to large and unpredictable fluctuations in revenues, earnings, and cash flow.
  
• Growing competitive intensity, both from international players with advanced technology and regional low-cost operators, may drive further pricing pressure and limit Arabian Drilling's ability to expand net margins or retain market share, particularly as contracts in new geographic markets are not guaranteed to offset domestic disruptions.
  
• Sustained capital expenditure requirements to reactivate suspended rigs, maintain fleet competitiveness, and comply with ESG standards will continue to depress free cash flow, restrict the company's ability to return capital to shareholders, and increase financial risk, especially now that dividend payments have been suspended and revenue visibility remains under threat.

Arabian Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Arabian Drilling compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Arabian Drilling's revenue will grow by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.8% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach SAR 500.6 million (and earnings per share of SAR 4.67) by about August 2028, up from SAR 237.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.7x on those 2028 earnings, down from 27.6x 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

• The company's SAR 2.4 billion backlog intake in Q2 2025-the largest since 2023-along with a total backlog exceeding SAR 11 billion and an average contract tenure of 2.4 years per rig, suggests solid long-term revenue visibility and potential future topline resilience even during market slowdowns.
  
• Arabian Drilling has successfully renewed nearly half (11 of 24) of its rigs up for contract in 2025, and is in final negotiations for additional renewals, supporting recurring revenue and mitigating the risk of material revenue drops from lost contracts.
  
• The company is actively executing significant cost-cutting and SG&A reductions, already realizing SAR 14 million in quarterly savings with a target annualized reduction of SAR 35–40 million and a lowered CapEx plan for 2025, which enhances free cash flow and underpins net margins during downturns.
  
• Management highlighted successful early steps in international expansion, including the first direct contract in the GCC outside Saudi Arabia and new tenders in Kuwait and other regional markets, which diversifies revenue sources and can reduce dependency on a single national market, supporting both revenue and earnings stability over time.
  
• Historical evidence shows that all previously suspended land rigs have eventually been called back to operation by Aramco, and current suspensions are contractual rather than structural, implying that a future market upturn (expected from 2026) could drive rapid increases in both utilization rates and associated earnings.

Valuation

• The assumed bearish price target for Arabian Drilling is SAR63.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Arabian Drilling's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be SAR3.7 billion, earnings will come to SAR500.6 million, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 20.8%.
• Given the current share price of SAR73.7, the bearish analyst price target of SAR63.0 is 17.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.