ADNOC subsidiary IPO launched
Thursday, Nov 30, 2017
Abu Dhabi National Oil Co. (ADNOC) launched the highly anticipated initial public offering (IPO) of a minority stake in its distribution and retail arm in late November – the latest departure in its rapidly evolving financing strategy.

Demand for the shares – the first opportunity for investors to acquire an interest in the emirate’s corporate economic bedrock – was expected to overshoot substantially the maximum available.

A comprehensive prospectus published ahead of the sale bolstered the appeal by outlining the current financial health and future growth strategy of ADNOC Distribution – buttressed by local fuel price liberalisation some two and a half years ago and an unassailable position in the company’s fast-growing domestic market.

On November 26, subscription was opened to an IPO of 1.25-2.5 billion shares in ADNOC Distribution – equivalent to 10-20% of total capital – each with a face value of 0.08 dirhams (US$0.02). The scrips are being offered in two tranches – with 5% reserves for retail investors and the remainder available to institutional investors and high net worth individuals.

The final price will be determined during the book-building process, with a range set of 2.35-2.95 dirhams (US$0.64-0.8) – valuing the company at US$8-10 billion. Subscription to the retail tranche will close on December 6 and that to the second tranche a day later – with pricing to be announced on December 8 and a listing on the Abu Dhabi Securities Exchange scheduled for December 13.

Unallocated retail shares will be redistributed among second-tranche subscribers. Citigroup, First Abu Dhabi Bank, HSBC and Merrill Lynch are the joint global co-ordinators – joined by EFG Hermes, Goldman Sachs and Morgan Stanley as joint bookrunners. Rothschild is the financial adviser.

A 180-page prospectus published on November 20 – summarised in a lengthy public statement – laid out the distribution company’s selling points.

The firm enjoys the largest market share in both the retail and wholesale fuel markets across the UAE and is the sole fuel retailer in Abu Dhabi – where demand is rising swiftly – and in Sharjah.

The ADNOC Oasis-branded network of the convenience stores – numbering 235 – is likewise the federation’s most extensive. Critical to future profitability, the subsidiary has flourished financially since the decision of the UAE government in August 2015 to liberalise local fuel prices – which now move in line with international oil prices – while enjoying long-term supply agreements with the parent company “which eliminate margin risk”.

The latter – the prospectus states somewhat euphemistically – creates “significant barriers to entry for new market participants”. The future growth strategy outlined focuses heavily on adding value to and increasing the efficiency of the core retail fuel business while expanding the convenience store operations.

Geographical expansion is also mentioned. Parading the company’s senior leadership, the recent appointment of Petri Pentti as chief financial officer – former CEO of Dubai government-owned rival Emirates National Oil Co. (ENOC) – was noted.

Gross profits in 2016 and in the first nine months of this year were 4.2 billion dirhams (US$1.1 billion) and 3.1 billion dirhams (US$848 million) respectively. The prospectus also detailed the proposed dividend strategy.

For the first full financial year of operations as a public company – running from next June – a total payment of at least US$400 million is intended, to be preceded by a one-off distribution of US$200 million in April. In 2019/2020, a dividend no lower than in the previous year is promised – after which yearly payments of at least 60% of distributable net income are anticipated.

The IPO has materialised more swiftly than was expected when ADNOC first mooted sales in some of the conglomerate’s services and downstream businesses in July as part of a broader “expanded partnership” strategy.

CEO Sultan al-Jabber reiterated the rationale in the IPO statement. “The ADNOC Group has embarked on an ambitious programme of transformation and growth [including] more proactive management of our portfolio of assets and capital structure,” he explained. “The IPO of ADNOC Distribution is an important milestone in this new approach.”

The parent company made its maiden venture into international capital markets in early November with a US$3 billion bond issue through newly created Abu Dhabi Crude Oil Pipeline Co. – a special purpose vehicle assuming ownership of the 1.5 million bpd Habshan-Fujairah export pipeline.

Orders in excess of US$11 billion were reportedly received for the paper, which included a 30-year tranche. Enthusiasm for Abu Dhabi quasi-sovereign credit was similarly demonstrated in ADNOC’s debut in the global syndicated loan market the previous month – which raised US$6 billion in two tightly priced tranches.

ADNOC has made it clear that – in contrast to counterpart Saudi Aramco – the parent company will remain wholly government-owned. Abu Dhabi has retained Aa2 and AA ratings from Moody’s and Standard & Poor’s respectively throughout the oil industry and revenue downturn since 2014.

Oil companies worldwide have struggled with rare attempts at listing in the years since the price slump – evident regionally in the experience of upstream-focused Kuwait Energy, which cancelled plans to float in London this year owing to a lack of investor interest.

Such apathy is causing concern to those involved in the planned IPO of 5% of shares in Aramco – to which the Abu Dhabi offering is somewhat misleadingly compared.

However, while garnering huge investor confidence from being guaranteed support by ADNOC and by extension the government, the subsidiary’s appeal is based less on the vicissitudes of global oil prices but rather on the health of the local economy and success in growing its retail offering.

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