GCC initial public offerings: An IPO of a country

Saudi Arabia (KSA), Oman, and UAE have consecutively announced plans to IPO parts of their oil giants in the market. In addition, Qatar Petroleum decided to merge its two liquefied natural gas divisions, QatarGas and RasGas. The recent announcements have been extensively covered by many news agencies such as Bloomberg and CNBC.

Many questions have been asked concerning the motives driving these “rich” Arab countries to privatise part of their state-owned “symbolic” energy producers. Two main interrelated explanations were provided. The first is a firm-related reason which has been best expressed by the CEO of Abu Dhabi National Oil Company (ADNOC) who says “In this new energy era, we need more creative strategies and more flexible business models to capture growth.” So, according to Dr. Al Jaber, ADNOC aims to explore new partnerships to increase its revenues through building an improved business model based on joint efforts between local and foreign managements and investors. The second reason is on a macro-level where the enhanced profitability of these giant state-owned companies (or at least a majority state-owned after the IPO) coupled with the extra cash to be generated from the IPOs help in creating better businesses’ diversification in the economy by reducing the reliance on oil and decreasing unemployment figures (especially in KSA and Oman); these are in line with the UAE’s and KSA’s economic visions for 2030.

As important as knowing why these GCC countries are selling part of their state-owned energy companies and what they need the money for, is to know whether the domestic markets in these countries are efficient enough to stand such large transactions. This question is viable since Aramco is planning to undergo the largest IPO in the history in a foreign market where it is anticipated to be the New York Stock Exchange (NYSE) or the London Stock exchange (LSE) with more incline to favour NYSE being the world’s largest exchange. However, both UAE and Oman are planning their IPOs to be in their local stock markets. Therefore, it is important to know the drivers behind these choices and whether it is related to trust issues in the local market or to have better access to international markets?

In addition, the timing of launching these IPOs is critical. These countries are in big trouble due to low oil prices which will affect the IPOs leading to under valuations of the shares. Meanwhile, these countries keep increasing their oil productions leading to further reductions in prices which in turn lower their national incomes. For example, ADNOC has approved an increase of oil production in 2018 by 400,000 barrels of oil a day.

Moreover, will these IPOs send an implicit message to smaller government owned companies to follow their footsteps in initiating more IPOs? It would be interesting to see the after-effect of these announcements on the IPOs market in the GCC and even in the MENA region and how these announcements may trigger a domino effect for more governmental IPOs.

 

05th of September 2017

By: Izidin El Kalak

 

Photo: “Number And Finance” by reynermedia  is licensed under CC BY 2.0

 

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