Abu Dhabi’s ADNOC on the rise after Fitch rating

ADNOC has begun selling shares in subsidiaries to foreign companies, entering into lucrative and strategic partnerships to expand its upstream and downstream operations.
Sunday 10/03/2019
An Emirati man walks by the logo of ADNOC in Ruwais.  (Reuters)
New opportunities. An Emirati man walks by the logo of ADNOC in Ruwais. (Reuters)

WASHINGTON - Credit rating service Fitch Ratings has bestowed two of its highest ratings on Abu Dhabi’s state energy firm, elevating the Abu Dhabi National Oil Company (ADNOC) over regional national oil companies (NOCs) and ranking its creditworthiness higher than oil majors like Royal Dutch Shell, Total and BP.

The two ratings — a stand-alone rating of “AA+” and long-term issuer default rating (IDR) of “AA” with a Stable Outlook — are the highest ratings currently attributed by Fitch to any oil and gas company.

The ratings are likely to open the Abu Dhabi state energy firm to global financial markets in a new way, with ADNOC and its subsidiaries able to readily raise funds from the international debt market at lower borrowing costs than other rated oil and gas firms.

The state firm said that while “ADNOC has no plans to issue a bond at the Group holding level, these credit ratings will enable greater access to a more international investor base and provide ADNOC with further smart financing options.”

The ratings are a response to ADNOC’s diligence in streamlining operations and selling stakes in key subsidiaries to move beyond being a profitable NOC that is a cash cow for its government to becoming a more commercially driven energy company that can compete with leading oil majors by expanding its global reach in upstream and downstream operations.

In assigning the “AA+” stand-alone rating to ADNOC, Fitch said the distinction “reflects the company’s high upstream output coupled with low production costs, significant reserves, downstream integration and a conservative financial profile.” The rating service said the “AA+” level corresponds to “the upper boundary of the rating spectrum for oil and gas companies.”

A stand-alone rating values the entity’s creditworthiness separate from external factors, such as, in ADNOC’s case, its ties to the government of Abu Dhabi.

Fitch extolled ADNOC’s profitability that “is in line with that of international oil majors and exceeds that of some national oil companies, in view of its low production costs, oil-heavy production profile and competitive tax regime.” The rating service highlighted the fact that, unlike other regional NOCs, “ADNOC has no social functions, such as subsidisation of gasoline prices or construction of social infrastructure, which has a positive impact on the company’s profitability.”

In addition, Fitch stressed the company’s flexible dividend policy, in which ADNOC is under “no obligation to pay out a certain proportion of earnings or a fixed amount” to the state.

The long-term IDR of “AA” with Stable Outlook ascribed by Fitch to ADNOC is in line with Fitch’s sovereign rating of ADNOC’s owner, the Abu Dhabi government, but the rating service capped ADNOC’s IDR at “AA” because of ADNOC’s relationship with the government, citing “strong links between the company and the sovereign and the influence the state can or does exert on the company through regulating the level of production, taxation and dividends.”

UAE Minister of State and ADNOC Group Director-General and CEO Sultan Ahmed al-Jaber stated that Fitch’s ratings decision “recognises ADNOC’s world-class resources, our strong operating and financial performance, our robust financial profile and our disciplined investment model.”

Since taking ADNOC’s helm in February 2016, Jaber has replaced leadership within the company’s key divisions and operating units and pushed for big internal consolidations, including the merger of two large offshore divisions and the merger of shipping and port service operations.

ADNOC is also playing a part in Abu Dhabi’s push for privatisation of state entities. While the holding company itself will not be listed, ADNOC is offering stakes in several of its service subsidiaries.

In December 2017, ADNOC listed 10% of its fuel distribution arm, ADNOC Distribution, on the Abu Dhabi Securities Exchange, with the initial public offering netting $851 million for the government. ADNOC reportedly has plans to float another 10% stake in the subsidiary, which is the largest operator of retail fuel service stations and convenience stores in the United Arab Emirates.

ADNOC has begun selling shares in subsidiaries to foreign companies, entering into lucrative and strategic partnerships to expand its upstream and downstream operations.

In October, ADNOC sold a 5% stake in ADNOC Drilling for $550 million to US oil services giant Baker Hughes. In January, in a deal valued at $5.8 billion, the Abu Dhabi firm signed partnership agreements that involved providing 20% and 15% stakes in ADNOC Refining, respectively, to Italy’s Eni and Austria’s OMV and the formation of a trading joint venture responsible for selling ADNOC’s refined crude products.

In February, ADNOC entered into a $4 billion agreement with US investment firms KKR and BlackRock to form a company called ADNOC Oil Pipelines, which will lease ADNOC’s interest in 18 pipelines that cover the state firm’s upstream concessions for a 23-year period. ADNOC, which will hold a 60% stake in the consortium, will maintain sovereignty over the pipelines and management of pipeline operations.