By now you know that Saudi Arabia plans a dramatic expansion of social benefits in an attempt to placate the angry public.This has big implications for the oil market, because to pay off all these bribes to the public, Saudi Arabia needs to pump more.
Who wins big in this?
According to BofA/ML Douglas L. Becker, it’s the oil services companies.
Based on recent meetings with BHI and HAL, we believe a rapid increase in Middle East activity is imminent, driven by Saudi Aramco. Like in the last up-cycle, we believe a rapid acceleration in Saudi activity could cause pricing power to shift to oil service companies. This is particularly significant given signs that int’l pricing currently remains under pressure. We expect the shares of SLB and WFT to be the initial beneficiaries of rising activity expectations in the Middle East given their high relative exposure to the region. However, HAL should benefit quickly as activity on the Manifa project ramps up and BHI should benefit from integrated projects.
Potential for a 30% increase in the Saudi rig count
Indications suggest Saudi Aramco is looking to increase its rig count to ~118 by year end from ~90 currently, roughly a 30% increase. This is consistent with comments from NBR, which expects the number of its Saudi rigs working for Saudi Aramco to increase by five or more. Additionally, we believe Abu Dhabi is looking to increase its rig count by 16. These rigs are expected to work on a mix of onshore/offshore and gas/oil wells.
The last time rig count expanded like this, notes BofA/ML, it coincided with a big increase in pricing power.
As for specific winners, check out Baker Hughes and Weatherford:
We believe the new Saudi activity outlook meaningfully reduces the risk to 2012 int’l margin assumptions and expect all the major integrated service companies to benefit from rising activity in Saudi Arabia, where we estimate all four companies generate approximately 3-4% of total revenue. However, in 2010 SLB and WFT generated 4% of their revenue from the Middle East//Asia region, compared to 17% for BHI and HAL.
As a result, we expect the shares of WFT and SLB to be the initial beneficiaries of rising activity expectations in the Middle East. However, HAL will be an early beneficiary as work on the Manifa project ramps up and BHI should benefit as it secures integrated projects in the Middle East (watch Iraq).