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Margaret Moran
Margaret Moran
Articles (260) 

Behind the Scenes of 2020's Biggest Energy Deal

Abu Dhabi’s state energy giant strikes a deal worth $20.7 billion with foreign investors as prices begin recovery

On June 23, Abu Dhabi National Oil Co., aka ADNOC, announced that it has struck a $20.7 billion energy infrastructure deal with a group of six foreign investing firms in what amounts to the largest deal of its kind in the region, as well as the largest in the world so far in 2020.

ADNOC is the state-owned oil company of the United Arab Emirates. Founded in 1971, the Abu Dhabi-based company is partially represented on the Abu Dhabi Securities Exchange under the name Abu Dhabi National Oil Co For Distribution PJSC (ADX:ADNOCDIST). The companys share price was flat following the announcement.

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The deal will create a new subsidiary, ADNOC Gas Pipeline Assets, which will own the lease rights to 38 natural gas pipelines connecting ADNOCs upstream assets to customers in the UAE.

ADNOC will retain a 51% stake in the assets, as well as remaining in charge of operations and capital expenditures. The remaining 49% stake will go to the group of six foreign investors, which consists of Global Infrastructure Partners, Brookfield Asset Management (NYSE:BAM), Singapores sovereign wealth fund GIC, the Ontario Teachers Pension Plan Board, NH Investment & Securities (XKRX:005940) and Snam SpA (MIL:SRG).

According to the announcement, the deal represents a "unique opportunity to invest in quality energy infrastructure assets with a low-risk profile that generate stable cashflows." ADNOC will lease the properties to its subsidiary for a period of 20 years, receiving in turn a "volume-based tariff" that is subject to both a floor and a cap.

Sultan al-Jaber, the CEO of ADNOC and the UAEs minister of state, had the following to say about the deal in an interview with CNBC:

We are excited to have completed this deal, and once again partner with some of the worlds leading infrastructure and institutional investors It is in fact a huge achievement, particularly given the current challenging economic climate and business environment, and it is, if anything, a testament to Abu Dhabi and the UAEs position as a trusted, reliable and credible investment destination.

Drawing capital in a crisis

The ability to draw additional investment money during unfavorable economic conditions is a boon to any company, even more so in a deal worth billions.

As a commodity, natural gas is nearly as subject to price volatility as oil is. The mechanisms that drive prices operate on a global scale and are dependent on supply, demand, laws and regulations and many other factors. Thus, most companies in the oil and gas sector have ended up heavily leveraged, especially in the U.S., where many smaller players in the fragmented shale oil industry have not benefitted from state support or drawn the interest of foreign investors.

The timing of this investment is undeniably beneficial for ADNOC, allowing it to not only strengthen its balance sheet but also to invest in making the ADNOC Gas Pipeline Assets as efficient and profitable as it can at the bottom of an industry-wide decline. One of the foundational rules of value investing is buying during tough times, whether its investing in business activities, buying back stock or anything else that will allow a company to recover faster than its competitors and grab a bigger share of the market.

Importantly, ADNOC will not need to fund the energy infrastructure project entirely with newly issued debt at unfavorable interest rates, as smaller and more debt-laden companies are having to do. The deal brings in $10.1 billion in foreign direct investment.

The oil industry is expected to tighten soon as travel begins to pick back up around the world and the production cuts made by OPEC+ begin to go into effect. Additionally, over the next 20 years during the timeframe for the deal, the UAE is expected to emerge as one of the worlds fastest-growing economies. While the political risk from the country, which represents a group of smaller monarchies, is a potential roadblock, the UAEs efforts to diversify its economy over the past decade have borne fruits, resulting in average gross domestic product growth of 3.5% per year over the past 10 years through 2019.

Conclusion

The energy sector has been on a tumultuous journey during the Covid-19 crisis as a supply glut and a collapse in demand brought profits to a near halt. In order to stay afloat, many players that do not have support from their states or institutional investors have had no choice but to take on additional debt granting yields of 10%-plus per annum.

In this environment, companies that are able to draw institutional support have the chance to gain a leg up over competitors, as they are in a better place to invest in growth and withstand lower commodity prices. Bringing in $10.1 billion from foreign investors in a deal worth $20.7 billion, ADNOC is one such company.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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