By Kurt Davis Jr.
Can Nigeria’s President employ the strategy of Saudi Arabia’s Crown Prince in privatising a state oil corporation? The goal to privatise the Nigerian National Petroleum Company (NNPC) – a state oil giant – has been around for nearly 20 years, at least, in some political corners of Nigeria.
Why go through the trouble?
Firstly, an Initial Public Offering (IPO) would put the NNPC on a bigger international stage, especially if the valuation is high. Secondly, an IPO would raise significant capital for the state of Nigeria, which can both strengthen the state’s finances and be used to diversify the Nigerian economy. Third, but probably less discussed, the privatization would theoretically shift the burden away from the sole responsibility of the Nigerian state of financing and managing an oil giant through more complicated times.
The revival of this privatisation discussion in the Nigerian parliament should not be surprising. The great success of the Saudi Aramco’s IPO changed the perspective of many state-owned oil managers and their governing officials. But can the NNPC be the next Saudi Aramco, at least, in terms of its IPO success?
No one knows this answer but it is clear that the country could benefit from mimicking the Saudi Arabian marketing strategy.
The MBS strategy
Saudi Arabia raised more than $29bn with the oil giant Saudi Aramco, being valued at $1.7trn, which surprised many observers. Many investment bankers may have smirked at the initial valuation of $2trn. But the Saudi Crown Prince Muhammad bin Salman (MBS) got the biggest laugh by creating the “MBS strategy to IPO’ing a state oil company.”
The state should create a stir about growth and activity in the country—best underwritten by a long-term growth strategy for the country (i.e., 2030 Vision for Saudi Arabia).
Appoint new leadership to establish direction and leadership for the company. Prior to the IPO, MBS appointed a new chairman for the company and a new oil minister. Set a valuation number that creates a discussion (and entices the world’s biggest investment banks to the transaction). President Muhammadu Buhari may have taken notice.
He appointed a committee to create “Vision 2050” to succeed Vision 2020. The focus will be on creating a major international power in economic terms, which includes lifting 100 million Nigerians out of poverty in the next 10 years.
Buhari appointed Mele Kolo Kyari to be the Group Managing Director of the NNPC in July 2019 and appointed Timipre Sylva to be Minister of State for Petroleum Resources in August 2019. The only step left is setting the valuation number but that may be the most challenging step in the MBS strategy.
Where Saudi Arabia was bold with its $2trn valuation, Nigeria will have to be more strategic. The NNPC and Aramco have different financial performance profiles. Aramco delivered a net income of $111bn in 2018, which was almost twice that of Apple, the world’s most profitable listed company at the time, and more than that of the biggest oil giants, including BP, Chevron ExxonMobil, Shell, and Total.
Between 2015 and 2018, the NNPC lost north of $1bn, according to its financials. As part of the IPO, Aramco also promised non-state shareholders would receive a proportionate share of “an annual base dividend” through 2024. The NNPC would struggle to underwrite a similar dividend promise in today’s market. Until the NNPC can fix the bottom-line financial numbers, investors will have to value the company based on its unreached potential. Investors tend to ask for a lot when they believe their money is being put at greater risk.
The very local nature of this discussion
The privatisation of the NNPC is an international discussion. But there are many factors to the process that are local. The financial records of the NNPC show that its major losses are the result of challenges at its subsidiaries, in particular the refineries.
To begin with, the loss-making nature of Nigerian refineries is not a new story, especially to local investors. Investors and market analysts have long highlighted the challenges, including pricing and bureaucracy, with running a refinery in the country. International investors will comb through these numbers with an expectation that the NNPC can provide a solution for this local problem but may discount value today as a result.
And secondly, the Nigerian oil and gas industry is facing headwinds that will surely hurt the NNPC’s performance. COVID-19 has surely undercut local and global demand for oil and gas. As global players become more climate friendly and diversify away from pure oil production, the NNPC does not appear to have made similar investments and currently lacks the cash resource to do so.
A listed NNPC will encounter shareholders who will want to see more modernization of strategy and assets for the company. Tapping the international debt capital market is an option for funding the necessary changes. But matching the success of Aramco will require some strategic changes four this Nigerian giant.
Nigerian officials should remember that local risks are better appreciated (or accepted) by local buyers. Aramco tapped its local equity market with a highly engaged marketing strategy. Through billboard advertisements, call centers, and social media; investment bankers actively courted the Saudi population. The Saudi central bank doubled leverage limits for retail investors buying shares in Aramco.
Wealthy Saudi businessmen felt compelled to participate in the IPO, which clearly helped the IPO by enticing more retail investors to join the offering. Nigeria will equally have to tap its wealthy business leaders and local retail investors to underwrite a significant portion of a listing for the NNPC. It is not clear; however, if that pool of Nigerian investors will be adequate for the percentage offered, especially if the valuation comes in high.
Bottom line
The rational for listing the NNPC is straightforward, and the challenges and concerns are also well-known. The uncertainty will weigh on Nigerian politicians today (and tomorrow) regardless of a listing. Therefore, Nigerian officials should simply take inspiration from Aramco and push forward, while remaining cautious and aware to the expectations and requirements from the market.
Kurt Davis Jr. is an investment banker focused on Europe, Middle East, Africa, and Turkey and is a member of the Council on Foreign Relations.