We initiate coverage on Arabian Drilling (AD) with a Neutral rating and a PT of SAR120. AD is one of the oldest and largest drilling services companies in Saudi, with a total of 45 onshore and offshore rigs. It provides a unique exposure to one of the key contributors of the unrivalled O&G industry in Saudi. Resilient demand dynamics, operational excellence, best-in-class profitability, and attractive growth opportunities places the company ahead of its peers, in our view. We expect AD to deliver an earnings CAGR (2021-2026f) of 22.9% to reach SAR767mn. The stock is trading at 2023f EV/ EBITDA of 9.4x vs its peers average of 7.5x which we believe reflects the positives.
The unsung champion: Arabian Drilling is a pioneer in Saudi drilling services with a strong track record. It provides a unique exposure to the champions behind the unmatched Saudi O&G market. The company has a fleet of 45 rigs consisting of 38 onshore (84.4% of the total) and 7 offshore (15.6% of the total), positioning it amongst the largest drilling operators in Saudi. AD has a strong Rig Efficiency Index (REI) score above 90% along with low Fleet Non-Productive Time of 0.74% in 2021 (vs the industry average of 2.0%), allowing it to renew its contracts on favorable terms. In addition to focusing on the opportunities in the Saudi market, the company is planning to expand regionally and to diversify into new businesses.
Saudi to drive rig demand: The MENA region is expected to record an additional hydrocarbon production of 20-30 mmboed by 2030f. Saudi hydrocarbon production is expected to record a CAGR of 3.0% during 2021-2025f, driven by increased gas production, in-line with the Energy Transition Strategy, which aims to achieve "net zero" carbon emission by 2060f. For oil, Saudi Aramco is pursuing a prudent reserve replacement strategy to maintain production and is also targeting to increase its MSC from 12 mmbpd to 13 mmbpd by 2026f. We believe this strategy will, to a degree, insulate the drilling industry against the fluctuation of international oil prices, while supporting additional rigs demand.
Earnings to record a CAGR of 22.9% during 2021-2026f: We expect revenue to grow at a 5-year CAGR of 16.0% to SAR4.6bn. Increased rig count from 45 in 2021 to 67 by 2026f and favorable dayrates are expected to drive growth. In addition, offshore segment's increasing contribution and cost-saving initiatives should translate into robust EBITDA margins of over 40%, higher than its global peers. We expect earnings to record a substantial increase of 90.9% in 2022f to SAR522mn. Over 2021-2026f, we expect earnings to record a robust growth of 22.9% to reach SAR767mn by 2026f.
Initiate coverage with Neutral rating and PT of SAR120.0: We initiate coverage on AD with a Neutral rating and a PT of SAR120.0. The company provides a unique exposure to one of the key contributors of the unrivalled O&G industry in Saudi. Resilient demand, operational excellence, and best-in-class profitability are the key strengths of AD. The stock trades at 2023f EV/ EBITDA of 9.4x, higher than its peer average of 7.5x, which we believe is pricing-in all the positives.