The Oil Company That Couldn’t Afford Toilet Paper Now Wants To IPO

By Irina Slav

Sonangol

If someone had reported that Angola was preparing its state oil company for privatization three years ago, many would have laughed refused to believe it. In 2016, Sonangol was in shamblesand rumor got around that the company couldn’t even afford to buy toilet paper for its offices. Now three years later, it is preparing for an initial public offering.

A lot has changed since 2016, and not just in oil prices. At the time, the head of the company was Isabel dos Santos, the billionaire daughter of then-president Jose Eduardo dos Santos who stayed at the helm of Angola for almost 40 years. Then he lost the election to Joao Lourenco who has pledged to overhaul the political and economic system of the country, and he seems to be sticking to his word.

Earlier this year, Lourenco announced that the government will privatize as many as 195 state companies by 2022. The goal is to reduce Angola’s dependence on oil, which last year contributed 15 percent of GDP, and rebuild the economy after the long civil war that began immediately after it gained its independence in 1975 and only ended in 2002.

Because of its size and importance, Sonangol will be the crown jewel in this lineup of 195 companies. Yet listing it would be no less tricky than listing Aramco, as Reuters’ Ed Cropley wrote in a recent analysis of the situation.

Like Aramco, Cropley noted, Sonangol is far from a transparent company. This will need to change urgently for investors to become interested in buying company shares at a time of heightened wariness about oil investments. And it’s not just transparency. Sonangol also has a corruption problem that needs to be solved ahead of any IPO preparations, not to mention appearances, including a functioning website, which Angola’s state company still does not have, Cropley notes.

The country’s bourse also has yet to become a fully functional one with no listings yet, and then there is also the issue with the local currency—the kwanza—which is far from stable.

In this context one is bound to ask if it’s worth the effort at all. According to Cropley and to several supermajors with interests in Angola, it just might be.

“Assume it continues to pump crude 600,000 barrels a day for the next decade, and prices hold around $70, while lifting costs creep up at 3% a year from 2018’s average of $7.5 per barrel,” Cropley wrote. “That produces annual cash flows, after 45% royalties and 30% tax, of $46 billion over the next decade.”

And then there are the supermajors. In April, Sonangol’s new chairman Carlos Saturnino, said the company was working with French Total and Italian Eni on analyzing exploration data for a number of oil blocks. Sonangol also sealed a deal with Exxon and its partners in offshore Block 15 to increase production by 40,000 bpd. The company is also quitting 52 joint ventures to focus on local production as part of efforts to attract more oil majors.

Another part of that effort, which also tackles the corruption problem, was the establishment of a Petroleum, Gas and Biofuels Agency that will manage oil and gas blocks instead of Sonangol.

Angola has proven oil reserves of some 9 billion barrels and gas reserves of 11 trillion cu ft of natural gas, according to U.S. government data. However, production is on the decline because of field maturation and lack of investments in new exploration. At an average of 1.37 million bpd as of this August, Angola’s oil output is set to fall further in the future unless these investments are made. If they are, they will certainly spark investor interest in Sonangol. If Angola fails to lure in more foreign oil companies, the point of an IPO would be questionable.

By Irina Slav for Oilprice.com

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