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ADNOC has signed a mega deal with a consortium of infrastructure investors and sovereign wealth and pension funds to invest in select ADNOC gas pipeline assets valued at $20.7 billion.
Besides highlighting the UAE as a top investment destination, the deal will significantly help an oil industry that is languishing with low oil prices and will pave the way for similar deals in the future, experts told Zawya.
The $20.7-billion deal is the biggest single infrastructure deal in the world this year.
Sultan Al Jaber, CEO of the ADNOC Group, said that it is the state-owned oil giant's biggest transaction since it rolled out its value-maximisation strategy three years ago.
The deal stipulates that the consortium - Singapore’s GIC, the Ontario Teachers’ Pension Plan Board, Italy’s Snam, Global Infrastructure Partners and Brookfield Asset Management and Korea’s NH Investment & Securities - will collectively acquire a 49 percent stake in newly created ADNOC Gas Pipeline Assets LLC.
The state-owned oil giant will lease its ownership interest in assets to the new company for 20 years in return for a volume-based tariff subject to a floor and cap.
The transaction will result in upfront proceeds of over $10 billion to ADNOC.
The deal is expected to reinforce amongst investors the business-friendly nature of the UAE and its reputation as a top destination for best-in-class capital and enterprises.
Top oil and gas companies worldwide are clamping on capex and reducing workforces since oil prices have plunged to record levels.
"The deal is such a huge achievement given the current global and regional economic condition as it shows that oil companies in the region are very attractive for foreign investors. The deal reflects UAE's rich track record and credibility as a highly trusted investment destination," Al Jaber said.
The UAE is ranked 19th on the 2020 Kearney Foreign Direct Investment (FDI) Confidence Index thanks to its overall strong business environment and the economic stability in the emirates. It is the only country from the MENA region to feature in the first 25 ranks.
With significant oil assets present, the opportunities for investors could be tremendous, according to global data provider Refinitiv.
"The deal would increase the interest amongst investors looking for taking a stake in cash generating assets. Especially at a time of considerable volatility in equities and most other asset classes, large pension funds could look at similar assets that could generate a steady dividend income," Sudarshan Sarathy, Senior Analyst, MENA Oil Research, Refinitiv told Zawya.
According to Al Jaber, the deal would allow ADNOC to reinvest responsibly and finance activities that produce higher returns. “We will continue to develop and explore additional investment opportunities across our value chain that provide an attractive risk-return profile to high quality, long-term investors,” he had told CNBC.
"While investors would hesitate putting money in oil and gas assets in risky areas, the UAE and the region largely holds majority of the world’s oil and gas reserves and production. The cost to produce and market the resources are one of the lowest in the world. This makes the national oil companies (NOCs) in the region one of the most competitive companies in the sector," said Sarathy.
The IPO of Saudi Aramco brought in record interest and showed that businesses in the region that could offer a steady dividend to the investors with relatively low risk would be in significant demand.
"There have been several MOUs signed and partnerships being explored to increase the petrochemical presence of the NOCs to create further value by going down the value chain. This could also be of interest to investors as the low-cost feedstock could help the region become a global petrochemicals hub," he added.
According to Fitch, the gas pipeline transaction should be viewed in the context of other deals ADNOC has recently entered into – the company is pursuing a strategy of bringing in minority partners to its operating companies to attract funding and improve access to overseas markets or share know-how.
This is illustrated by Eni and OMV together acquiring a 35 percent stake in ADNOC Refining for $5.7 billion in July 2019 and a merger of ADNOC's fertiliser business with OCI's MENA assets in a joint venture.
Also, in 2019 ADNOC sold a 49 percent stake in ADNOC Oil Pipelines to BlackRock, KKR, GIC, and Abu Dhabi Retirement Pensions & Benefits Fund for around $5 billion.
"Attracting funding through equity-like transaction means the company keeps debt under control, which is in line with ADNOC’s conservative funding strategy. It also means that ADNOC would potentially have more financial resources available to invest into growth projects to enhance its oil production capacity and increase natural gas production," Dmitry Marinchenko, senior director at Fitch Ratings told Zawya.
Paving the way for more deals
This is the second successful deal of this type for ADNOC, which suggests that other companies in the region could potentially follow the suit. "We do not rule out that such deals could become more widespread,” Marinchenko said.
According to Refinitiv, the region could see more such deals subject to economic recovery and prices of oil remaining stable. That would help maintain the conducive environment for capital to flow and deals to take place.
"The enormous scope of the petroleum and downstream sector in the region is definitely of interest for global players who have been waiting for long to become shareholders in the growth of the sector and the region," said Sarathy.
"Also, the diminishing interest in the oil space is more and more pivoted into the natural gas, renewables and assets that are capable of returning a steady source of revenue. Hence, when it comes to institutional investors, there is a higher chance of them to focus on asset-oriented industries with a stable cash flow than being directly invested in the upstream oil space," he added.
(Writing by Seban Scaria, editing by Anoop Menon)
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