The coming years will be defining for NOCs as they fully embrace the need to embark on capital transformation. New capital can provide the catalyst to return the country’s finances to an equilibrium and act as an engine to drive greater economic diversity.
2. Page 2 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 has
unleashed a chain reaction with far-reaching consequences on Government budgets, sovereign
investment, economic development incentives and, critically, on subsidy support and social welfare
programs.
This is increasing the pressure on NOCs to transform the way they operate and change the very
nature of their relationship with the State.
The coming years will be defining for NOCs as they fully embrace the need to embark on capital
transformation. Seeking new capital can provide the catalyst to return the country’s finances to an
equilibrium and act as an engine to drive greater economic diversity, making sure that the company’s
growth and development translate into more general economic growth for the country.
3. Page 3 Raising external capital driving NOC transformation
The eight critical aspects for NOC transformation
NOCs of the future need to understand and address the aspects of their transformation to successfully
deliver both quality of earnings and contribution to the State.
Internationalization
Funding
People capabilities and
skills development
Enabling technology
Vertical integration
Autonomy
Revenue streams
and diversification
Balancing national versus
commercial objectives
NOC
transformation
In this deck, we consider
the requirements for
raising external capital,
particularly through an
IPO, and how these
requirements can drive
the transformation
process
4. Page 4 Raising external capital driving NOC transformation
The key stakeholders in the NOC transformation journey
Key stakeholders
NOC as
the company
How will the NOC work, what role will
it play and what will be its relationship
with the State
01 Government as
regulator of industry
How will the (new) Government
regulatory body operate and manage
the regulatory burden and competing
priorities of parties
02 Government
as shareholder
What will be the NOC’s financial
contribution and overall contribution
to the wider economy
03
5. Page 5 Raising external capital driving NOC transformation
Raising external capital provides the opportunity to transform the industry
and 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 potential
investors
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, periodic
reporting
► Restrictions on management’s freedom of action,
e.g., approval required from supervisory board or
shareholders for important issues; new investors with
voting 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 to
reporting requirements in investor reports
► Shareholder expectations may increase pressure on
management to achieve performance targets
Pros
Cons
6. Page 6 Raising external capital driving NOC transformation
Realistic and
executable
strategy
Tax and legal
structure — legal
protection and
governance rights
Capital structure
Return drivers
Corporate
governance —
quality of
management
Quality of assets
Access to
cash 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 and
manageable risk
7. Page 7 Raising external capital driving NOC transformation
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-fenced
from the NOC
No or limited
recourse
Limited
compliance
burden
Relatively
cheap
Strategic
insight
plus capital
Knowledge
transfer
Deep pool of
capital
Longer term
horizon
Can be cost-
effective
Risk profile
flexible
Deep markets
Cost-effective
Creates
liquidity
Enables other
options
Disadvantages Expensive
and time-
consuming to
implement,
and requires a
high degree of
certainty
Volatile (links
to
oil price)
Availability
varies
Can reduce
optionality
Onerous to
establish
Additional
disclosure
External
influence
Line of sight
to IPO
External
influence
Public
reporting
requirements
Other
compliance
External
control/influen
ce
Compliance
burden
Less onerous Individual capital options or stage gates on the journey to an IPO More onerous
8. Page 8 Raising external capital driving NOC transformation
Attracting external capital drives a range of requirements for all key
stakeholders
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 demonstrate
equity story and growth
strategy based on leading
NOC practices
No, but standalone working
capital facilities would be
required
No, but reserve reporting and
cash flows will be required
No, but business plans will
be needed
No, but business plans will
be needed
No, but path to IPO should
be clear
Defensive cash flow case will
need to be presented during
investor ‘road show’
Integrated equity story/returns
and growth case need to be
presented during investor
‘road show’
Ability to communicate a
quantifiable strategy and
convert that into annual
guidance to be measured
against
No No, but regular checks of
reserve model or covenants
may be required
No No No, but strategy to support
convertible economics will
be needed
Yes, as will be subject to
rating agency scrutiny
Yes, as will be subject to
extensive equity analyst and
investor scrutiny
Legal structure change to
benefit investors or for
indexation
No No, but may use a captive
finance vehicle
May be specific JV
requirements
No No No, but may use captive
finance vehicle
Yes
Internal and external financial reporting
IFRS reporting and
benchmarking of accounting
policies
Not mandatory Not mandatory, but may be
required by covenants
JV may need to report in
partner GAAP
Likely to be IFRS
requirements for SWF
reporting
Likely Yes Three-year audited IFRS
track record
Accelerated financial closing
and reporting timetable
No No No No No Likely to be required due to
stock exchange requirements
Likely to be required due to
stock exchange requirements
Half-year or quarterly
reporting
Not formal, but may be
required by covenants
Not formal, but may be
covenant requirement
Consistent with partner
requirements
Consistent with SWF
requirements
Yes Yes Half-year reporting required
Corporate governance, systems and controls
Risk assessment, reporting
and internal audit
No No No No No Possible Likely to be required due to
stock exchange requirements
Board reorganization No No No Investor may require board
representation
No No Formal board and
subcommittee composition
requirements
Full disclosure and reporting
of transactions with related
parties
No No No No No Commentary likely to be
included in prospectus/notes
to accounts
Yes. Relationship agreement
may also be required with
main shareholder
Formalized reporting
structure, reporting lines and
policies around disclosure of
sensitive information
No No Likely to be covered by JV
agreement
May be SWF requirements No Likely to be required due to
stock exchange requirements
Likely to be required due to
stock exchange requirements
MoreexternallyfacingMoreinternallyfacing
9. Page 9 Raising external capital driving NOC transformation
The NOC will need to demonstrate its strategy to become a leading NOC
and demonstrate a compelling equity story
Basic
Developing
Established
Advanced
Leading
NOC is funded by production revenue and Government subsidies
only
NOC is funded by production revenue, Government subsidies
and also has access to external development finance
NOC is funded by production revenue, external commercial
finance 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 and
uses its treasury function to manage its cost of capital and risk
Funding
10. Page 10 Raising external capital driving NOC transformation
Three key funding mechanisms for NOCs
1
Project
financing
2
Bond
markets
3
IPO
11. Page 11 Raising external capital driving NOC transformation
What does good project financing for an NOC look like
Although obtaining project finance does not carry the same level
of requirements as planning for an IPO, there are still many factors
which should be addressed to get access to the global capital
markets, get the best deal and manage a successful project.
Mature projects will typically have multi-stakeholder equity
participation, a substantial SPV, established public credit ratings
and full project finance and governance models and procedures.
Funding structure ring-fenced
Project Equity story/strategy and
framework
Stand-alone project finance structure
Reporting/project monitoring
Credit ratings
Financial risk management framework
Strategic factors to address
“
“
12. Page 12 Raising external capital driving NOC transformation
Accessing financing through bond markets
Whilst public bond issuance requires significant disclosure, albeit
not as onerous as an IPO process, such disclosure and access to
global bond markets does convey credibility to the international
investment community. Even at a minimum, 3 year historic
financials would likely be required and with no public credit ratings
and a less developed risk framework leaving notable credit risks, a
secured bond issuance will typically have onerous restrictions on
additional financing. Whereby successful bondholder financing will
include established public credit ratings, extensive historical
disclosure, comprehensive risk factors framework and will avoid
typically onerous restrictions on additional financing.
Liquidity requirements
Funding currency requirements
Credit ratings
Establishing international capital
markets credibility
Corporate governance
Sanctions/other regulatory matters
Strategic factors to address
“
“
13. Page 13 Raising external capital driving NOC transformation
Raising capital through an IPO requires the company to be IPO-ready
Early stage Mid-stage IPO-ready
Equity story Strategic direction Strategic direction
and budget
Integrated
strategy, plan and
financing
Financial history Local GAAP Consolidated
accounts
IFRS three-year
record
Group structure Legacy businesses Rationalised Efficient tax and
legal structure
Related party
transactions
Overlap and
confusion
Company
accountability
Clean full year
Forecast financial
information
Cash-based
annual plan
Accrual-based
forecasting
Reliable capital
forecasts
Tax position Unidentified risks Assessed risks Mitigation and
disclosure strategy
Title Assumed Assessed Attested
Financial control
and governance
Proprietor
discipline
Professional
management
Governance
procedures
Strategic factors What does IPO-ready look like
Robust equity story aligned to a differentiated strategy
consistent with the asset portfolio supported by a credible
management able to articulate the strategy in a public equity-
friendly way
Equity story
A funding structure consistent with the strategy set out in the
equity story that is able to weather all aspects of the
commodity cycle
Funding
Clear and transparent shareholder and corporate structures
with straightforward business models are more attractive to
investors
Stand-alone
corporate
structure
The amount of the offering and the use to which the proceeds
are put will be evaluated by investors. Forecasts and plans
will be required as part of the listing process
Use of proceeds
A strong management team with track record of having
delivered on plans on time and on budget. New board
structures and governance processes will need to be put in
place
Corporate
governance
Sufficiently robust stand-alone reporting systems and controls
to comply with regulatory requirements
Accounts and
information
systems
The IPO readiness assessment is the first step in the IPO value journey …
14. Page 14 Raising external capital driving NOC transformation
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 relations
function exist?
► Non-core/non-commercial activities that may
depress earnings and valuation
► Availability of distributable reserves to support
dividend policy
► Structure of balance sheet once listed
► Development of the equity story
Banking
► Can the business produce its external reporting
on a timetable that meets the regulatory
requirements in the listing jurisdiction?
► Are the accounting policies currently applied
and the levels of disclosure given in line with the
international peer group.
► Are the current forecasting processes fit for
purpose and in line with those we would expect
from a listed business?
► Is the internal financial reporting harmonized
with the external reporting, enabling the
business performance to be monitored on like-
for-like basis?
► Is the management data produced on a timely
basis in order to allow the business to be
monitored effectively?
► Can data be accessed from JVs on a timely
basis in order to understand performance?
Financial and taxation
► Loss of competitive position due to increased
disclosure
► Lead time on reservoir reporting if external MER
required (and ability of any MER to do it)
► Timing and complexity of separation from
existing parent
► HSE reporting and required public
HSE reporting — e.g., sustainability reporting
Operational/commercial
► Suitability of governance framework for various
exchange requirements
► Requirements to disclose details of senior
management and board remuneration
Legal/regulatory
15. Page 15 Raising external capital driving NOC transformation
Considerations for the Government as regulator of industry
1 2 3 4 5 6 7 8 9 10
IPO planning IPO execution IPO realization
► Develop a well-defined purpose
► Establish a core set of attributes to which
strategic priorities should be aligned
► Develop an organizational culture around the
core set of attributes
► Build human capital that maintains technical
competence, ensures empathetic engagement
and continued commitment to professional and
public integrity
► Involve public in the operationalizing regulatory
excellence and identifying management
priorities
► Set a strategic approach to performance
measurement and evaluation
► How will any subsidy reform impact on the new
company and how will competing priorities of
shareholders and Government be managed?
Policy and Regulation
► What will be the governance structure and will
this be able to manage increasing velocity of
information and change?
► Is the data to be produced by the company of a
quality that will support regulatory excellence
► Is the current employee skill set able to meet
the changing regulatory role demands
► What will be the right performance measure to
drive the desired industry behaviors and
outcomes?
► How will noncompliance with regulations be
managed, and what fees or fines will be
implemented for violations of environmental,
financial and HSSE guidelines?
Governance
► What type of ERM framework will be put in
place to evaluate and regulate risks to the
economy, environment and society and future
opportunities, and threats to performance
goals?
► How will access to and analysis of data be
managed, and how will information be made
accessible to all stakeholders without increasing
the 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 new
nature of the relationship
► What level of foreign ownership is proposed?
► Is there a wider policy to attract investment
► Are there efficient concession processes in
place to increase sector attractiveness and
maximize new capital?
Internationalization and diversification
16. Page 16 Raising external capital driving NOC transformation
Considerations for the Government as shareholder
1 2 3 4 5 6 7 8 9 10
IPO planning IPO execution IPO realization
► Does the Government have an appropriate
stewardship function to act as shareholder in a
publicly listed entity
► Has the Government relied on the NOC for any
functions that need to be accommodated in the
Government post IPO?
► Has the cost of required Government capacity
building been taken into account in assessing
the costs and benefits of the IPO
Capacity building
► Is the business preparing sufficiently to meet
external reporting requirements and produce
forecasts that can be relied on for Government
budget planning
► What implicit subsidies are currently in place,
and what is the cost of their removal prior
to IPO
► Will the aggregate flow of funds to investors
including the share retained by the State post-
IPO adversely impact the fiscal or external
balance of the State
► Will the raising of external debt finance by the
company be subject to any State-imposed
limitation
Financial and taxation
► Has the NOC developed a compelling equity
story to support demand and valuation
► Is senior management appropriate for a publicly
listed entity? What capability gaps need to
be filled?
► Have the relationships with other trading
commercial entities within the entire
hydrocarbon value chain been put onto an
arm’s-length basis
► How will subsequent company growth be
translated into more general economic growth
for the country in wider commercial areas to
support State industrialization and economic
diversification
Operational/commercial
► Is the framework in place to set up a new
“contract with the State” that defines the new
nature of the relationship? What valuation
impact will this have?
► What level of foreign ownership is proposed
► What level of ongoing influence is the
Government targeting, and what impact will this
have on demand and pricing for the IPO
► How will relationships with other parts of the
Government or State-held entities be regulated?
Will this lead to any value leakage, and what
impact will this have on demand and pricing?
Legal/regulatory
17. Page 17 Raising external capital driving NOC transformation
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 your
management team to understand the context of the transaction and brief them on an IPO process.
IPO
assessment
workshop
IPO
requirements Diagnostics
IPO
diagnostic
report
1
2
3
4
► Motivation and
infrastructure
► Reporting and finances
► IPO objectives
► Private placement
► Listing requirements
► Prospectus directive
► Gap analysis
► Follow-up workshops
for individual areas
► Standardizing of current
position versus what is
required to be IPO-ready
► Suggested approaches
and actions for closing
gaps
Approach
Diagnostics: We compare the target structure with your
current position to identify gaps.
Analysis: In individual follow-up meetings and research, we
help you clarify what is needed to close the gaps in terms of
time, content and resources.
Report: These results will then be documented and
presented back to the management team.
Assessment: Based on the results from the findings of the
IPO readiness assessment workshop, we develop an initial
set of recommendations in line with your Stated IPO
objectives.
18. Page 18 Raising external capital driving NOC transformation
The EY Global IPO Center of Excellence puts our know-how at your
fingertips
Use this virtual central hub to access all of our IPO knowledge,
experience and resources in one easy-to-use source
Easily access the power of EY global IPO network
IPO readiness and
preparing for an IPO
Alternatives to an IPO
Cross-border listings
Find details and register for upcoming EY events
Explore the activity on the IPO markets worldwide with “EY
insights: facts & figures”
Find out more at ey.com/ipocenter
19. Page 19 Raising external capital driving NOC transformation
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 pitfalls
and lock in the results on which your future depends.
► We work with the leading companies in the oil and gas industry. This broad and deep
exposure means we understand the dynamics of the sector and the underlying
drivers of the leading actors.
► Our global sector is committed to providing industry insight that creates value for
you. It connects our oil and gas professionals worldwide and serves as a hub for
sharing 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 global
capabilities. Clients see us as the most globally connected
organization among the Big Four. Whether you are already active
in multiple geographies or are planning to expand your business to
other countries, we can assemble a multinational team that
combines deep industry knowledge, experience resolving the
issues you are facing and savvy local advice.
Oil and gas is one of EY’s primary sectors. Our Global Oil & Gas
Sector is dedicated to offering industry insight and coordinating a
network of more than 10,000 oil and gas professionals who are
ready to develop practical approaches to the assurance, advisory,
tax, transactions and finance-related issues you face.
Contacts
Andy Brogan
+44 207951 7009
abrogan@uk.ey.com
Paul Navratil
+971 2 417 4400
Paul.Navratil@ae.ey.com