raising external capital to drive noc transformation

Raising externalcapital to driveNOC transformation

Raising external capital driving NOC transformation

National Oil Company (NOC) transformation journey

For many emerging economies heavily dependent on oil revenue, the dramatic fall in prices hasunleashed a chain reaction with far-reaching consequences on Government budgets, sovereigninvestment, economic development incentives and, critically, on subsidy support and social welfareprograms.

This is increasing the pressure on NOCs to transform the way they operate and change the verynature of their relationship with the State.

The coming years will be defining for NOCs as they fully embrace the need to embark on capitaltransformation. Seeking new capital can provide the catalyst to return the country’s finances to anequilibrium and act as an engine to drive greater economic diversity, making sure that the company’sgrowth and development translate into more general economic growth for the country.


The eight critical aspects for NOC transformation

NOCs of the future need to understand and address the aspects of their transformation to successfullydeliver both quality of earnings and contribution to the State.

Internationalization

Funding

People capabilities andskills developmentEnabling technology

Vertical integration

Autonomy

Revenue streamsand diversification

Balancing national versuscommercial objectives

NOCtransformation

In this deck, we considerthe requirements forraising external capital,particularly through anIPO, and how theserequirements can drivethe transformationprocess


The key stakeholders in the NOC transformation journey

Key stakeholders

NOC asthe company

How will the NOC work, what role willit play and what will be its relationshipwith the State

01Government asregulator of industry

How will the (new) Governmentregulatory body operate and managethe regulatory burden and competingpriorities of parties

02Governmentas shareholder

What will be the NOC’s financialcontribution and overall contributionto the wider economy

03


Raising external capital provides the opportunity to transform the industryand the NOC

Government► External financing will assist in moving away from

Government funding/subsidy► Improvements in transparency from increased scrutiny

and reporting requirements► Increase in accountability and operating efficiency► Focus on GDP generation instead of political and

national objectives► Optimization of the overall tax and regulatory regimes

for the benefit of the State, NOC and potentialinvestors

Company► Access to fresh capital to replace Government funding► Flexibility in decision-making and improvements in

optionality► Enhanced ability to attract, retain and reward valued

employees through share option plans► Opportunity to bond and incentivize key

people with long-term incentive plans

Government► Time-consuming: board members at lender meetings,

road shows, investor relations tasks, periodicreporting

► Restrictions on management’s freedom of action,e.g., approval required from supervisory board orshareholders for important issues; new investors withvoting rights

► Firewall between NOC resources and Government

Company► Time-consuming: board members at road shows,

investor relations tasks, periodic reporting► Restrictions on management’s freedom of action,

e.g., approval required from supervisory board,bondholders or shareholders for important issues;new investors with voting rights

► Potentially strict corporate governance requirements► Greater transparency and potential loss of control or

confidentiality concerning sensitive information due toreporting requirements in investor reports

► Shareholder expectations may increase pressure onmanagement to achieve performance targets

Pros

Cons


Realistic andexecutablestrategy

Tax and legalstructure — legalprotection andgovernance rights

Capital structure

Return drivers

Corporategovernance —quality ofmanagement

Quality of assets

Access tocash flows

Liquidity

Transparency

Some of these areas trigger different levels of requirements, ranging from less to more onerous,depending upon the type of external finance sought

Key areas to address when seeking to attract external capital providers

Quantifiable andmanageable risk


Key types of external capital

Project financing Corporate/reserve-based lending

Private capital— strategic/JV

Private capital(e.g., SWF)

Convertibles Public bond IPO

Advantages Ring-fencedfrom the NOCNo or limitedrecourse

LimitedcomplianceburdenRelativelycheap

Strategicinsightplus capitalKnowledgetransfer

Deep pool ofcapitalLonger termhorizon

Can be cost-effectiveRisk profileflexible

Deep marketsCost-effective

CreatesliquidityEnables otheroptions

Disadvantages Expensiveand time-consuming toimplement,and requires ahigh degree ofcertainty

Volatile (linkstooil price)Availabilityvaries

Can reduceoptionalityOnerous toestablish

AdditionaldisclosureExternalinfluence

Line of sightto IPOExternalinfluence

PublicreportingrequirementsOthercompliance

Externalcontrol/influenceComplianceburden

Less onerous Individual capital options or stage gates on the journey to an IPO More onerous


Attracting external capital drives a range of requirements for all keystakeholders

Project financing Corporate/reserve-based Lending

Private capital —strategic/JV

Private capital(e.g., SWF)

Convertibles Public bond IPO

Strategy, legal and capital structure

Requirement to demonstrateequity story and growthstrategy based on leadingNOC practices

No, but standalone workingcapital facilities would berequired

No, but reserve reporting andcash flows will be required

No, but business plans willbe needed

No, but business plans willbe needed

No, but path to IPO shouldbe clear

Defensive cash flow case willneed to be presented duringinvestor ‘road show’

Integrated equity story/returnsand growth case need to bepresented during investor‘road show’

Ability to communicate aquantifiable strategy andconvert that into annualguidance to be measuredagainst

No No, but regular checks ofreserve model or covenantsmay be required

No No No, but strategy to supportconvertible economics willbe needed

Yes, as will be subject torating agency scrutiny

Yes, as will be subject toextensive equity analyst andinvestor scrutiny

Legal structure change tobenefit investors or forindexation

No No, but may use a captivefinance vehicle

May be specific JVrequirements

No No No, but may use captivefinance vehicle

Yes

Internal and external financial reporting

IFRS reporting andbenchmarking of accountingpolicies

Not mandatory Not mandatory, but may berequired by covenants

JV may need to report inpartner GAAP

Likely to be IFRSrequirements for SWFreporting

Likely Yes Three-year audited IFRStrack record

Accelerated financial closingand reporting timetable

No No No No No Likely to be required due tostock exchange requirements

Likely to be required due tostock exchange requirements

Half-year or quarterlyreporting

Not formal, but may berequired by covenants

Not formal, but may becovenant requirement

Consistent with partnerrequirements

Consistent with SWFrequirements

Yes Yes Half-year reporting required

Corporate governance, systems and controls

Risk assessment, reportingand internal audit

No No No No No Possible Likely to be required due tostock exchange requirements

Board reorganization No No No Investor may require boardrepresentation

No No Formal board andsubcommittee compositionrequirements

Full disclosure and reportingof transactions with relatedparties

No No No No No Commentary likely to beincluded in prospectus/notesto accounts

Yes. Relationship agreementmay also be required withmain shareholder

Formalized reportingstructure, reporting lines andpolicies around disclosure ofsensitive information

No No Likely to be covered by JVagreement

May be SWF requirements No Likely to be required due tostock exchange requirements

Likely to be required due tostock exchange requirements

Mor

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The NOC will need to demonstrate its strategy to become a leading NOCand demonstrate a compelling equity story

Basic

Developing

Established

Advanced

Leading

NOC is funded by production revenue and Government subsidiesonly

NOC is funded by production revenue, Government subsidiesand also has access to external development finance

NOC is funded by production revenue, external commercialfinance and equity investors

NOC is funded by a combination of external commercial finance,equity investors and/or production revenue

NOC is funded by a range of internal and external sources anduses its treasury function to manage its cost of capital and risk

Funding


Three key funding mechanisms for NOCs

1

Projectfinancing

2

Bondmarkets

3

IPO


What does good project financing for an NOC look like

Although obtaining project finance does not carry the same levelof requirements as planning for an IPO, there are still many factorswhich should be addressed to get access to the global capitalmarkets, get the best deal and manage a successful project.Mature projects will typically have multi-stakeholder equityparticipation, a substantial SPV, established public credit ratingsand full project finance and governance models and procedures.

Funding structure ring-fenced

Project Equity story/strategy andframework

Stand-alone project finance structure

Reporting/project monitoring

Credit ratings

Financial risk management framework

Strategic factors to address

““


Accessing financing through bond markets

Whilst public bond issuance requires significant disclosure, albeitnot as onerous as an IPO process, such disclosure and access toglobal bond markets does convey credibility to the internationalinvestment community. Even at a minimum, 3 year historicfinancials would likely be required and with no public credit ratingsand a less developed risk framework leaving notable credit risks, asecured bond issuance will typically have onerous restrictions onadditional financing. Whereby successful bondholder financing willinclude established public credit ratings, extensive historicaldisclosure, comprehensive risk factors framework and will avoidtypically onerous restrictions on additional financing.

Liquidity requirements

Funding currency requirements

Credit ratings

Establishing international capitalmarkets credibility

Corporate governance

Sanctions/other regulatory matters

Strategic factors to address

““


Raising capital through an IPO requires the company to be IPO-ready

Early stage Mid-stage IPO-ready

Equity story Strategic direction Strategic directionand budget

Integratedstrategy, plan andfinancing

Financial history Local GAAP Consolidatedaccounts

IFRS three-yearrecord

Group structure Legacy businesses Rationalised Efficient tax andlegal structure

Related partytransactions

Overlap andconfusion

Companyaccountability

Clean full year

Forecast financialinformation

Cash-basedannual plan

Accrual-basedforecasting

Reliable capitalforecasts

Tax position Unidentified risks Assessed risks Mitigation anddisclosure strategy

Title Assumed Assessed Attested

Financial controland governance

Proprietordiscipline

Professionalmanagement

Governanceprocedures

Strategic factors What does IPO-ready look likeRobust equity story aligned to a differentiated strategyconsistent with the asset portfolio supported by a crediblemanagement able to articulate the strategy in a public equity-friendly way

Equity story

A funding structure consistent with the strategy set out in theequity story that is able to weather all aspects of thecommodity cycle

Funding

Clear and transparent shareholder and corporate structureswith straightforward business models are more attractive toinvestors

Stand-alonecorporatestructure

The amount of the offering and the use to which the proceedsare put will be evaluated by investors. Forecasts and planswill be required as part of the listing process

Use of proceeds

A strong management team with track record of havingdelivered on plans on time and on budget. New boardstructures and governance processes will need to be put inplace

Corporategovernance

Sufficiently robust stand-alone reporting systems and controlsto comply with regulatory requirements

Accounts andinformationsystems

The IPO readiness assessment is the first step in the IPO value journey …


Considerations for the NOC as the company

1 2 3 4 5 6 7 8 9 10

IPO planning IPO execution IPO realization

► Does a financial investor relationsfunction exist?

► Non-core/non-commercial activities that maydepress earnings and valuation

► Availability of distributable reserves to supportdividend policy

► Structure of balance sheet once listed

► Development of the equity story

Banking

► Can the business produce its external reportingon a timetable that meets the regulatoryrequirements in the listing jurisdiction?

► Are the accounting policies currently appliedand the levels of disclosure given in line with theinternational peer group.

► Are the current forecasting processes fit forpurpose and in line with those we would expectfrom a listed business?

► Is the internal financial reporting harmonizedwith the external reporting, enabling thebusiness performance to be monitored on like-for-like basis?

► Is the management data produced on a timelybasis in order to allow the business to bemonitored effectively?

► Can data be accessed from JVs on a timelybasis in order to understand performance?

Financial and taxation

► Loss of competitive position due to increaseddisclosure

► Lead time on reservoir reporting if external MERrequired (and ability of any MER to do it)

► Timing and complexity of separation fromexisting parent

► HSE reporting and required publicHSE reporting — e.g., sustainability reporting

Operational/commercial

► Suitability of governance framework for variousexchange requirements

► Requirements to disclose details of seniormanagement and board remuneration

Legal/regulatory


Considerations for the Government as regulator of industry

1 2 3 4 5 6 7 8 9 10


► Develop a well-defined purpose

► Establish a core set of attributes to whichstrategic priorities should be aligned

► Develop an organizational culture around thecore set of attributes

► Build human capital that maintains technicalcompetence, ensures empathetic engagementand continued commitment to professional andpublic integrity

► Involve public in the operationalizing regulatoryexcellence and identifying managementpriorities

► Set a strategic approach to performancemeasurement and evaluation

► How will any subsidy reform impact on the newcompany and how will competing priorities ofshareholders and Government be managed?

Policy and Regulation

► What will be the governance structure and willthis be able to manage increasing velocity ofinformation and change?

► Is the data to be produced by the company of aquality that will support regulatory excellence

► Is the current employee skill set able to meetthe changing regulatory role demands

► What will be the right performance measure todrive the desired industry behaviors andoutcomes?

► How will noncompliance with regulations bemanaged, and what fees or fines will beimplemented for violations of environmental,financial and HSSE guidelines?

Governance

► What type of ERM framework will be put inplace to evaluate and regulate risks to theeconomy, environment and society and futureopportunities, and threats to performancegoals?

► How will access to and analysis of data bemanaged, and how will information be madeaccessible to all stakeholders without increasingthe vulnerability to security threats?

Risk and reputation management

► Is the framework in place to set up a new“contact with the State” that defines the newnature of the relationship

► What level of foreign ownership is proposed?

► Is there a wider policy to attract investment

► Are there efficient concession processes inplace to increase sector attractiveness andmaximize new capital?

Internationalization and diversification


Considerations for the Government as shareholder

1 2 3 4 5 6 7 8 9 10


► Does the Government have an appropriatestewardship function to act as shareholder in apublicly listed entity

► Has the Government relied on the NOC for anyfunctions that need to be accommodated in theGovernment post IPO?

► Has the cost of required Government capacitybuilding been taken into account in assessingthe costs and benefits of the IPO

Capacity building

► Is the business preparing sufficiently to meetexternal reporting requirements and produceforecasts that can be relied on for Governmentbudget planning

► What implicit subsidies are currently in place,and what is the cost of their removal priorto IPO

► Will the aggregate flow of funds to investorsincluding the share retained by the State post-IPO adversely impact the fiscal or externalbalance of the State

► Will the raising of external debt finance by thecompany be subject to any State-imposedlimitation

Financial and taxation

► Has the NOC developed a compelling equitystory to support demand and valuation

► Is senior management appropriate for a publiclylisted entity? What capability gaps need tobe filled?

► Have the relationships with other tradingcommercial entities within the entirehydrocarbon value chain been put onto anarm’s-length basis

► How will subsequent company growth betranslated into more general economic growthfor the country in wider commercial areas tosupport State industrialization and economicdiversification

Operational/commercial

► Is the framework in place to set up a new“contract with the State” that defines the newnature of the relationship? What valuationimpact will this have?

► What level of foreign ownership is proposed

► What level of ongoing influence is theGovernment targeting, and what impact will thishave on demand and pricing for the IPO

► How will relationships with other parts of theGovernment or State-held entities be regulated?Will this lead to any value leakage, and whatimpact will this have on demand and pricing?

Legal/regulatory


Managing the IPO process

Our approach to the IPO diagnostic process is set out below. It commences with a workshop where we would work together with yourmanagement team to understand the context of the transaction and brief them on an IPO process.

IPOassessmentworkshop

IPOrequirements Diagnostics

IPOdiagnostic

report

1

2

3

4

► Motivation andinfrastructure

► Reporting and finances

► IPO objectives► Private placement► Listing requirements► Prospectus directive

► Gap analysis► Follow-up workshops

for individual areas

► Standardizing of currentposition versus what isrequired to be IPO-ready

► Suggested approachesand actions for closinggaps

Approach

Diagnostics: We compare the target structure with yourcurrent position to identify gaps.

Analysis: In individual follow-up meetings and research, wehelp you clarify what is needed to close the gaps in terms oftime, content and resources.

Report: These results will then be documented andpresented back to the management team.

Assessment: Based on the results from the findings of theIPO readiness assessment workshop, we develop an initialset of recommendations in line with your Stated IPOobjectives.


The EY Global IPO Center of Excellence puts our know-how at yourfingertips

Use this virtual central hub to access all of our IPO knowledge,experience and resources in one easy-to-use sourceEasily access the power of EY global IPO network

IPO readiness andpreparing for an IPO

Alternatives to an IPO

Cross-border listings

Find details and register for upcoming EY eventsExplore the activity on the IPO markets worldwide with “EYinsights: facts & figures”Find out more at ey.com/ipocenter


What you can expect when working with EY► We make it our business to understand your business and to keep our advice

relevant to your needs.

► We work with you as you transform your business, helping you anticipate the pitfallsand lock in the results on which your future depends.

► We work with the leading companies in the oil and gas industry. This broad and deepexposure means we understand the dynamics of the sector and the underlyingdrivers of the leading actors.

► Our global sector is committed to providing industry insight that creates value foryou. It connects our oil and gas professionals worldwide and serves as a hub forsharing industry-focused knowledge to help you succeed in a changing world.

At a glance

Why

choose EY? EY is known for its deep oil and gas sector knowledge,relationships with the industry’s key stakeholders and strong globalcapabilities. Clients see us as the most globally connectedorganization among the Big Four. Whether you are already activein multiple geographies or are planning to expand your business toother countries, we can assemble a multinational team thatcombines deep industry knowledge, experience resolving theissues you are facing and savvy local advice.

Oil and gas is one of EY’s primary sectors. Our Global Oil & GasSector is dedicated to offering industry insight and coordinating anetwork of more than 10,000 oil and gas professionals who areready to develop practical approaches to the assurance, advisory,tax, transactions and finance-related issues you face.

ContactsAndy Brogan+44 207951 [email protected]

Paul Navratil+971 2 417 [email protected]

EY | Assurance | Tax | Transactions | Advisory

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