Adnoc unit's IPO a trailblazer for region's energy privatisation

Adnoc Distribution a sensible choice for the parent company’s first IPO to gain experience and exposure

UAE motorists still enjoy driving in one of the cheapest markets for petrol in the world. Courtesy ADNOC

We have all contributed a little to the profits of Adnoc distribution and now, with the company’s initial public offering on the Abu Dhabi stock exchange, there is the chance to share in its success.

As a trailblazer for the emirate’s - and region’s - energy privatisation, it has to do well.

The IPO of neighbouring state juggernaut, Saudi Aramco, is also in the pipeline. Saudi Arabia's crown jewel, it has access to huge oil reserves, and complex business spanning vertically integrated refineries and petrochemical plants, international ventures and numerous subsidiaries in non-core ventures.

Adnoc Distribution is a far more straightforward proposition, however. Comprising UAE petrol stations and fuel distribution, it is a fairly straightforward business and not critically strategic. It is listing on the local market where it is a familiar face and can count on a supportive approach from the exchange.

All this makes Adnoc Distribution a sensible choice for the parent company’s first IPO, and a way to gain experience and commercial exposure in advance of possible offerings of other Adnoc units. This is a sensible, if not radical, way to pick up the gauntlet that Aramco laid down last year. Other UAE state companies, such as Emirates Global Aluminium, which is due to list next year, can benefit from the trailblazing and increased interest from international investors.

The National reported that Adnoc Distribution has set the IPO pricing at between Dh2.35 and Dh2.95 per share.

At this price range and on a 12.5 billion share count, this equates to approximately $8 to $10 billion in equity value but that represents a sizeable multiple to earnings before interest, tax and depreciation of about 16 to 20 times. The company has indicated a dividend of at least $400 million in the calendar year 2018, a yield of 4 to 5 per cent.

With such a pretty full indicative price, and a generous dividend policy, the company will need ways to grow which are not dependent on too much capital spending.

Fuel retail businesses worldwide contend with cut-throat competition, low margins and - in developed countries - slow growth or even shrinkage. Adnoc Distribution’s position is rather happier.

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Its part-privatisation became possible from August 2015, when subsidies were removed from UAE retail prices for petrol and diesel. Before then, the subsidy on petrol meant fuel companies incurred a loss on every litre sold. Adnoc could absorb this within its profitable oil-producing business, but Emarat and Enoc suffered deficits and ultimately sold most of their stations in the northern emirates to Adnoc. This left the Abu Dhabi major with about 67 per cent of the national market.

Since then, fuel prices have been regulated, set at international levels plus a retail margin, making petrol stations a safe, profitable business. Adnoc Distribution has a practical monopoly in Abu Dhabi and Sharjah, and a dominant position everywhere else except Dubai. However, these regulated prices do not allow the company to vary rates in response to demand or timing - for instance charging higher prices for the only station open late at night.

Queues at petrol stations throughout the country at peak times are a familiar experience to motorists. In emerging districts, and along the freshly-opened Sheikh Mohammed bin Rashid road between the capital and Dubai, new Adnoc stations are ready to open. The company plans expansion into Dubai and also into Saudi Arabia, though it could face more competition at home too, especially if Enoc responds to its move onto its home turf.

With 360 stations today, opening another 10-12 annually represents steady growth around 3 per cent, although volumes per station are likely to drop. Enoc too plans to open some 16 stations per year in Dubai.

Yet despite these strong prospects, annualised fuel volumes sold at Adnoc’s stations in 2017 so far are down almost 4 per cent on last year. It is unclear whether this is due to the economic slowdown, higher fuel prices discouraging consumption, seasonal changes or other factors. In the longer term, it may have to contend with more electric vehicles, more public transport or other changes in mobility.

It also sees most potential to expand its business by growing its non-fuel retail – the Mars Bars, lattes and groceries that earn a much higher margin. So the IPO has already had the effect of making the company look hard at its business and see where it can offer more services to customers, and where to generate more profit.

One of the stated goals of the IPO is to support the expansion of the UAE’s private sector, though Adnoc will retain 80 to 90 per cent of the shares, at least for now. Given its incumbency, scale, distribution network and access to the output from Adnoc’s refineries, Adnoc Distribution is in a strong position to beat off competition.

This presents something of a tension. As part-privatisation of this and other entities progresses, the government needs to maximise value from firms where it still owns the majority, while giving a chance to small and medium enterprises, the main motors of innovation and job creation.

The Adnoc Distribution IPO needs to succeed on its own terms, but also to set the agenda for the whole reform programme.

Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis