The aftermath of Saudi Arabia’s recent decision to reduce its production growth is still being felt, despite attempts by some companies to downplay the impact. Stock prices of several oil services companies took a sharp hit on Tuesday following Saudi Arabian Oil Co.’s announcement that it would no longer increase capacity as previously planned.
The decline continued on Wednesday, with SLB witnessing another 1.1% drop in recent trading, after plummeting by 7.2% on Tuesday. Similarly, Baker Hughes experienced a 2.1% slide following a 2.2% drop the previous day. Nabor Industries saw a 2% decline on Wednesday, in addition to a 1.7% fall in the previous session. Moreover, Saipem, the Italian oil services company operating in the Middle East, suffered a significant tumble of 12% on Wednesday.
One major challenge for the sector is the lack of specific details provided by Saudi Arabian Oil Co., also known as Aramco, about its decision. Aramco simply stated that the Saudi government, which holds the majority of its shares, instructed the company to restrain plans for expanding capacity to 13 million barrels per day by 2027 from the current 12 million. This expansion was expected to be achieved through offshore oil drilling. More information is anticipated to be revealed during an investor presentation scheduled for March.
SLB, an industry leader that has contracts with Aramco, expressed confidence that the decision will not impact its earnings for 2024.
Saudi Aramco Projects Unaffected Despite Suspension of Two Offshore Oil Increment Projects
According to a statement released by Schlumberger (SLB), the company is still closely collaborating with Saudi Aramco, affirming that all current oil and gas projects remain unaffected except for the suspension of two offshore oil increment projects that have not yet commenced. SLB emphasized that the majority of its operations in Saudi Arabia are focused onshore or in natural gas.
Baker Hughes CEO, Lorenzo Simonelli, echoed similar sentiments and expressed his confidence in the long-term outlook for the industry.
However, not all investors and analysts share the same optimism. CFRA analyst, Jonnathan Handshoe, downgraded SLB from a Buy to a Hold rating, citing concerns about the company’s future growth beyond 2024. Handshoe pointed out that the international demand picture for 2024-2025 might be weaker than previously anticipated, leading to a reduction in his earnings estimate for 2025 by 62 cents per share.
Handshoe also highlighted the potential impact of further measures implemented by Saudi Arabia to mitigate any additional weakening in demand. Given that over 30% of SLB’s total revenues are derived from the Middle East & Asia markets, there is a level of caution regarding SLB’s earnings potential for 2025.