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Cyril Widdershoven

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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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A Worrying Trend For International Oil Giants

International ratings agency Fitch has awarded the Abu Dhabi National Oil Company (ADNOC) a stand-alone credit rating of AA+. This rating is evidence of ADNOC’s ongoing transformation from a traditional NOC into a more commercially-driven and innovative organization. The AA+ rating is the highest that Fitch gives out to companies in the energy sector. The ratings agency reiterated that a standalone rating only takes into account an entity’s creditworthiness without including the ecosystem connected to it. The most remarkable fact at present is that ADNOC has a higher rating than the sovereign rating of its main shareholder, the government of Abu Dhabi. The Abu Dhabi NOC holds vast reserves and a high (and expanding) upstream output, which is combined with low production costs, strong downstream integration and a conservative financial profile.

ADNOC has clearly outperformed its main IOC rivals, such as Petrochina, Shell, BP and Total, which are rated A+, AA-, A and AA- respectively by Fitch. The ADNOC rating came after the successful downstream IPOs put in place by the NOC, such as ADNOC distribution. At present, ADNOC holds around 4.2 per cent of the global production of crude, almost all produced and owned in Abu Dhabi. In 2018 ADNOC increased its hydrocarbon reserves by 1 percent, while adding 7.1 percent of proven gas reserves. Last month, several mainstream IOCs, such as ENI, were awarded several new oil and gas concessions, targeting additional reserve and production expansions. With a production capacity of 3.5 million bpd, ADNOC is already in the top league of producers, but by 2020 it expects its production to increase to 4 million bpd, rising to 5 million bpd by 2030. Possible growth is also expected in local gas production as Abu Dhabi is aiming to become a net gas exporter in the coming years, countering ever growing local demand.

The attention of the financial world will undoubtedly be drawn by ADNOC’s AA+ rating, which will be of interest as Saudi Aramco plans to target international bond issues in the coming weeks. The new AA+ rating will undoubtedly help ADNOC to access international debt markets at lower costs. While ADNOC itself is not yet looking at international bond issues, one of its main units already entered the debt market in 2017, issuing an $3 billion bond, which was more than three-times oversubscribed.

Related: Bank Of America: Oil ‘Anchored’ Until 2024

The success story of ADNOC will likely have a positive effect on other ratings and debt issuing projects in the region. In the coming weeks, Aramco’s plans to access international debt markets will be of particular interest as it aims to finance part of its projects and a possible merger with SABIC. Following ADNOC’s success it would not be surprising to see Aramco get a similar rating.

This may be bad news in the eyes of other international IOCs however, as the attractiveness of their companies has been waning of late. While giants such as Shell are reporting record profits and higher margins, institutional investors appear to be less interested in providing new capital for upstream and downstream projects of IOCs. The possibility of added competition from the new kids on the block, such as ADNOC or Aramco, will certainly cause some headaches in London, The Hague and Houston.

By Cyril Widdershoven for Oilprice.com

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