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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Is Abu Dhabi’s Oil Major Eyeing An Aramco Style IPO?

Abu Dhabi

Abu Dhabi’s national oil company, ADNOC, has gotten the Saudi fever it seems. After restructuring part of its ongoing upstream business, most notably, the merger of some of its Operating JVs (OPCOs), the company now seems to have set its eyes on privatizing part of its downstream assets, with its main target being an increase in overall revenue streams and greater access to more markets. Looking at the ongoing IPO-fever in the Arab Gulf countries, especially Saudi Arabia and Oman, it is a logical step forward. The Emirates now seem to have access the same investors and markets as its competitors. ADNOC’s CEO Sultan Al Jaber stated to the press that his company is looking to float some of its services businesses and enter tie-ups with global investors. Talks already are being held with regards to possible partnerships. The ADNOC official indicated that some deals could be expected before the end of 2017.

Looking from the sidelines, the ADNOC strategy is clear - take advantage of the immense interest currently in the market to invest in the Arab Gulf region. Using the possible leverage of the announced Saudi Aramco IPO, the Abu Dhabi company could be successful in attracting high interest for its own downstream business. However, the risks could be high. Not only due to the continuing low oil price climate, but also due to the effect of fishing in the same pond that its main rival Aramco, and also Oman, are currently fishing. In contrast to the Aramco IPO, which is openly targeting international investors and institutional groups, the ADNOC listing of minority stakes in its downstream groups is meant for local equity markets. Related: Macquarie: OPEC Deal To Collapse In 2018

ADNOC’s approach - not be listing stakes in ADNOC, the main mother company, which is fully owned by the Abu Dhabi government - is already tricky, to say the least. The interest for a stake in a local Abu Dhabi entity, which is still fully engaged in the local market, does not bode well for its overall attractiveness and profitability. Local Emirati markets are not yet known for their high profit margins, as fuels are being subsidized, and prices are very low. The sentiment that this privatization of some of the downstream assets of ADNOC will be supporting the diversification efforts of the Emirates is also only part-reality. The attractiveness of the three shipping and marine service businesses is still a question. Until now, real competition did not exist. Looking at the Saudi Vision 2030 plans, however, and the expansion drive of Saudi Arabia’s national shipping company, BAHRI, or the multi-billion dollar investments in the Ras Al Khair Shipyard, the Emiratis will be looking at steep competition.

ADNOC’s downstream oil and gas business and operating service stations are not real structural money-making machines. Interest in their IPO or listing will depend on links with other ADNOC operations. Institutional investors and private equity companies will be wary of the lack of growth potential in the market, compared to other Gulf-based opportunities. At the same time, several potential investors, such as Royal Dutch Shell, will be not very interested to re-enter a market which has become a grave-yard. The lack of success of IOCs such as Shell in Abu Dhabi -looking at the ADCO mishap - could become a major issue in an investment assessment procedure.

The only real option, as Al Jaber indicated, would be to connect the ADNOC listings with investment opportunities in Asian markets. ADNOC could be trying to invite their Asian connections to participate in ADNOC JV’s, while Abu Dhabi would be given additional openings to Asian markets, especially China and India. International investors could also be looking at storage and infrastructure/pipeline assets in Abu Dhabi and the other emirates. This last option from an institutional investment point of view, is the most attractive, but still will depend on the overall risk assessments and ROIs offered.

The overall approach, however, still looks a little bit flawed. First, ADNOC’s attractiveness is not based on its current downstream assets, even if they include the shipping and yard assets. The market at present for shipyards and oilfield services related operations (jackups etc) is totally depressed. The global rig market is struggling, with more than 100 new rigs stacked in Asia and other places, waiting for clients. With regards to downstream operations, the Emirati market is also not very attractive, not even with current low oil and gas prices. It would have been much more sensible to put this news in the market just after the first results would have come in from the Aramco IPO. A success in Saudi Arabia will result in an investment fever, pushing other deals along. At the same time, higher or more stable oil and gas prices are also needed to give an additional impetus to investors to even consider these largely nationalized investment schemes in the Gulf region. Related: The Biggest Obstacles For China’s $900 Billion Silk Road

The competition in the market is not sitting still and has already claimed a large amount of prospective investment flows. Looking at the current Arab Gulf constellation, non-Arab investors will be underwhelmed by the possible ADNOC listing in the near future. The increased geopolitical risk premium that should be placed on the continuing Qatari crisis could further destabilize the region and the respective economies on the short- to midterm. Assessing the potential market in the Emirates at present is tricky. Abu Dhabi’s NOC should reassess the timing, as at present, the possible revenues from such a move are going to be much lower than ideal. Political risk, financial instability and increased regional competition, especially in the downstream and services sectors, is not a factor to build a successful listing of assets on. The need for diversification is there, for all Arab oil and gas producers, but the timing will be the key to success.

The real interest of investors in Abu Dhabi has never been the downstream. Upstream is key. If ADNOC, which has successfully tried to reshape and revamp its OPCO structure, wants to hit the bullseye with its listing, it should wait and reassess where to start first.

Maybe it is better to wait to end 2018, when oil markets are stabilized, the fall-out of the Qatar crisis is known, and the ongoing restructuring of ADNOC OPCOs and the merger of Mubadala-IPIC is finished. To enter the market at present, looking at the immense challenges still ahead, the evolution of ADNOC from a stagnate, old fashioned NOC into a vibrant INOC with new, business minded DNA, is too challenging and could even lead to some negative results. Patience is needed. Clarity and a long-term strategy, based on politics, geopolitics and market assessments, should be put in place. Take the camel approach, it goes slower than an Arabian thoroughbred, but in a desert, the success rate of a camel is higher!

By Cyril Widdershoven for Oilprice.com

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