Energy market developments enhance the growth engines of ADNOC’s listed companies

The UAE’s decision to leave the Organization of the Petroleum Exporting Countries (OPEC) and the OPEC+ alliance reflects a trend towards harmonizing production levels in a responsible and thoughtful manner in line with production capacity, demand and market conditions.

For ADNOC’s portfolio of listed companies, this development contributes to removing one of the restrictions that has historically limited the ability to transform investments in production capacity into operational activity and financial performance.

OPEC used the quota system as a tool to manage global oil supply, but this framework imposed restrictions on production, regardless of the investments made by member states to increase their production capacities.

With the large investments made by the UAE to increase its production capacity, the current stage allows greater flexibility to link production levels to these investments, which supports achieving more stable usage rates across the various stages and aspects of the value chain in the energy sector.

Analysts believe that the direct impact on oil markets will be limited in the near term, as prices continue to be affected by geopolitical factors and existing supply conditions.

HSBC said that the UAE’s exit from OPEC is unlikely to lead to a tangible impact on the markets in the short term, although it may affect the organization’s ability to coordinate supplies over time, while the ING Group described this step as reflecting a trend towards a more competitive market and a focus on the volume of production.

Data from the Abu Dhabi Securities Exchange (ADX) showed a positive reaction following the announcement, as the shares of “ADNOC Gas”, “ADNOC Distribution”, “ADNOC Drilling”, “ADNOC Logistics and Services”, “Vertiglobe”, and “Borouge” recorded gains.

Shares within the ADNOC system of listed companies recorded superior performance, with an average increase of 5.2%.

“Vertiglobe” topped the gains, with an increase of 10.3%, after announcing strong results for the first quarter. “ADNOC Drilling” shares rose by 8.1%, and “ADNOC Logistics and Services” shares rose by 7.8%, while “ADNOC Gas” shares rose by 3.7%, while “Borouge” and “ADNOC Distribution” shares also closed higher.

Analysts said that these moves reflect expectations of higher levels of activity and improved visibility regarding production volumes.

At the level of ADNOC’s listed companies, it is expected that increased production will translate into broader operations across the value chain, supporting improved rig operation rates at ADNOC Drilling, an increase in processing volume at ADNOC Gas, and growth in the volume of transportation operations at ADNOC Logistics and Services.

In this context, Morgan Stanley upgraded ADNOC Gas’s rating to “Overweight” and raised the target price for the stock to 4.20 dirhams, which indicates the possibility of an increase of about 25% to 30% compared to prevailing levels, supported by expectations of increased production volume and improved operating rates as production operations return to normal levels, which enhances the clarity of vision regarding financial performance and profits in the medium term.

Analysts also pointed out that these developments are directly reflected in the evaluations and expectations related to the companies’ performance, with Morgan Stanley expecting an increase in the volume of production at ADNOC Gas, while EFG Hermes classified both ADNOC Gas and ADNOC Drilling among the companies that benefit most from the increase in activity levels, thanks to their ability to expand operations and improve operating rates while increasing production levels.

Hermes added that the strong operational fundamentals support stable dividends based on strong cash generation.

It is noteworthy that the decision taken by the UAE to exit OPEC will contribute to enhancing the integration between its production capacity, production levels, and financial performance, in light of the oil markets continuing to be affected by global economic factors and geopolitical fluctuations.

For ADNOC’s listed companies, this decision is expected to support higher levels of activity and enhance visibility regarding profits over time.