The Daily Update - Abu Dhabi's expansion and diversification

As regular readers are aware, we recently added a holding in State-owned Abu Dhabi Crude Oil Pipeline (ADCOP) 4.6% 2047s. Rated Aa2, this bond has performed well since issue, having gained roughly 2.54 points. It continues to offer attractive expected returns, which we calculate at ~17%, with the additional yield of 4.40%; the highly rated bond also offers over 5.7 notches of credit cushion, i.e the market is mispricing the issue as a Baa1/Baa2 credit. We also favour the Emirate's sovereign paper, having added the 4.125% 2047s at issue, and more recently the 3.125% 2027s; rotating out of Saudi Arabia sovereign positions. Both bonds offer in excess of 3 notches of credit uplift, with expected returns and yield of 16.1% and 7.2%, respectively.

Yesterday the ADCOP’s parent, state-owned ADNOC (Abu Dhabi National Oil Co.)  announced a five-year spending plan of AED 400bn (~USD109bn) to expand its refining and petrochemical units internationally. In addition to investing in downstream activities, ADNOC also announced plans to extract and produce “unconventional gas” products within the next five years as “enhanced efficiencies have brought ADNOC’s leading low production costs down even further”.

Also, over the weekend ADCOP said it is taking orders for its touted USD 2bn IPO. The Group’s Chief Executive, Sultan Al Jabeer noted that the IPO will be centered around the evolution of the fuel distribution unit, and hopefully “unlock the inherent value in the business”. According to sources, 1.25-2.5bn shares will be issued between AED 2.35-2.95 suggesting that as much as 20% of the fuel distribution is up for grabs; market valuation is estimated at over USD 10bn. At USD 2bn, this IPO would be the UAE's largest listing in a decade. This will also the first time an Emirate has launched an energy-linked equity issue; which is strange considering the majority of government revenue in the region is generated from hydrocarbon activity.

The final announcement on the deal is expected by December, 8, with the stock expected to begin trading live on the ADX by the following Wednesday. No doubt we will hear from Saudi Aramco following this deal, as Middle Eastern oil giants strive to diversify their economies.