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National priorities shape NOC strategies

The state of countries’ finances—together with their exposure to market volatility and the pandemic—is determining funding possibilities for state oil companies

With national economies reeling from the global economic slowdown caused by Covid-19 prevention measures, a variety of approaches have been adopted to keep debt at NOCs down to manageable levels.

Any discussion of the debt management strategies adopted by NOCs around the world is likely to quickly turn to Norway’s Equinor. While one of the larger listed oil companies, it is still almost 70pc owned by the Norwegian government.

Equinor recently announced a dividend cut—probably easier to agree when the state controls more than two-thirds of the company’s equity—and there is a draft proposal going through the Norwegian parliament that would also provide significant tax relief.

This is an example of the government of an oil-producing country trying to limit the pain inflicted by shutting wells, explains Christopher Kuplent, head of analytics and data organisation Bank of America Global Research’s European equity research team for oil and gas. “In this case the tax relief would be factored around capex, which gives Equinor an incentive to continue to invest,” he says.

Equinor’s net debt-to-capital ratio at the end of 2019 was 28.5pc, placing it at the higher end of the range just below BP and just above Shell.

“It is a lot easier to come to market if you are highly rated, and the majors—and even some of the NOCs—fall into this category” Hope, BofA Global Research

While the move to cut dividends was likely a political decision, the tax relief proposal sends a clear message to all taxpayers—not just shareholders—that they need to support the oil industry and are going to have to take some pain in the process.

While the Norwegian tax law has yet to be passed, Kuplent stresses that he expects this approach to be replicated, to some degree, among other NOCs around the world. He notes, for example, that Russia already has a tax regime where the rate goes down on a sliding scale as the price of oil falls.

“Other NOC downgrades we see may be more related to a sovereign downgrade,” he adds. One of the most interesting approaches to mitigating the impact of this link is Galp Energia in Portugal, which embarked on a sizeable capex campaign attached to a number of discoveries in Brazilian ultra-deepwater pre-salt basins as far back as 2010.

At that time, Portugal was caught in the depths of the eurozone crisis. Despite the fact that Galp realised it had to lever up to fund its campaign, it realised it was better off not having a credit rating as it would be penalised for being headquartered in Portugal. To this day the company does not have a credit rating, yet it has successfully placed bonds.

Lower dividend

Saudi Arabia’s dividend policy for the Saudi Aramco IPO was also interesting in that the sovereign wealth fund majority owner would potentially receive a lower dividend than the free float equity shareholders. “You could argue this is another way of providing state support to a NOC when times are tough,” adds Kuplent.

Not only was Equinor not the obvious candidate to be first out of the blocks among NOCs with a dividend reduction, it did not play safe with a 10pc or 20pc cut but instead implemented a two-thirds reduction.

This perhaps sounds more dramatic than it is because the dividend is paid on a quarterly basis, so it leaves the hope that this is a coronavirus-induced decision and that it would not take too many quarters for the dividend to be re-established.

BofA Global Research stress tests suggest Equinor’s balance sheet did not need the implied cash saving from this cut, so it may be more about sharing the load between shareholders and the taxpayers, who will fund the proposed tax relief.

“We do not expect any of the other investment grade rated oil companies in Europe to use the next few weeks or months to announce dividend policy changes,” says Kuplent. “However, if there is no positive sign of recovery in the next six months others may follow Equinor in cutting their dividend.”

The main criteria for any NOC looking to go into the debt market would be its rating rather than the oil price, according to Kay Hope, director of emerging markets corporate credit research at BofA Global Research.

Credit ratings

“It is a lot easier to come to market if you are highly rated, and the majors—and even some of the NOCs—fall into this category,” says Hope, who covers oil firms such as Aramco, Russia’s Gazprom and Rosneft, Azerbaijan’s Socar and Kazmunaigaz (KMG), the state-owned oil and gas company of Kazakhstan. Her team also covers Pemex in Mexico and Malaysia’s Petronas.

“In addition to Shell, BP and Total we have seen issuance from Gazprom and Petronas, the last of which was particularly interesting given the scale at $6bn.”

Rates overall are still low, so although these companies might be paying a higher spread, this is more than compensated for by the lower rates. Hope says the decision over whether or not to issue debt would not be made on the basis of whether they would be paying a few extra basis points.

28.5pc Equinor’s net debt-to-capital ratio at the end of 2019

“They are still able to do deals at levels they find acceptable, and the high-grade bond issuances we have seen have been very well received,” she continues. “We have not seen so much activity in high yield, but if we consider average spreads in high yield compared to high grade, high yield is priced out for some names at this time.”

“Part of being a highly-rated corporate is that you manage your liquidity very tightly, so investment grade rated oil companies have a lot of levers they can pull such as undrawn credit facilities and large cash positions—options that are not available to most independents,” adds Hope.

NOC debt issuance is often announced at very short notice—perhaps just a week before—so analysts do not get much insight on what is going to be coming to market in the next few weeks or months, explains Carl Larry, performance director at market data provider Refinitiv.

“There are sometimes rumours, but debt issuance is sensitive to each country’s economic structure around lending rates and where they would look to borrow,” he says. “For NOCs, financing would likely come from their respective country although some outliers may be listed, such as Equinor or Saudi Aramco.”

Finance allocation

As such, it can be hard to discern what money is allocated where or within which debt instrument within an NOC. Larry observes that Nigeria seems to finance its NOC, NNPC, through loans rather than a debt structure, whereas Venezuela has debt issuances outstanding directly to its NOC, Pdvsa.

According to Larry, it is hard to forecast what an oil company would need for further debt structures. “I do not see any distinct trends or disparities in the debt performance of NOCs compared to IOCs or independents, but it may be that as oil prices continue to plummet we see NOCs folded into a country’s structural debt,” he says.

This would make sense, in that a country that balances its GDP will be focused on overall demand and economic activity more so than on a single commodity.

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