Netherlands-headquartered OCI NV (OCI) and The Abu Dhabi National Oil Co. (ADNOC) plan to combine their Middle East and North African fertilizer assets in a new joint venture, which – the parties said – will become the largest export-focused nitrogen fertilizer platform globally, and the largest producer in the MENA region.
It will have a combined production capacity of 5 million mt/y of urea and 1.5 million mt/y of sellable ammonia. The combined saleable capacity represents approximately 10 percent of 2018’s combined ammonia and urea global seaborne exports, according to OCI.
The announcement on June 17of the new strategic partnership by the companies followed media speculation over the weekend that they were considering combining their Middle East fertilizer businesses, and will see state-owned ADNOC combine its fertilizer business, ADNOC Fertilizers, into OCI’s Middle East and North Africa (MENA) nitrogen fertilizer platform to form the new joint entity.
OCI and ADNOC will own a 58 percent and 42 percent stake, respectively, in the jv, which is expected to generate between $60-$75 million in annual synergies, predominately through commercial synergies, the companies said.
Annual revenues for the combined entity are $1.74 billion with an EBITDA of around $800 million, based on 2018 pro forma figures, OCI said.
“This combination brings greater geographic diversity to the platform’s MENA production channels, enabling greater combined market access to strengthen market share and better serve its customers around the world,” said the two companies.
The new entity, which will be headed by OCI CEO Nassef Sawiris, will have a centralized commercial team, supported by a robust storage and distribution infrastructure with access to key ports on the Mediterranean, Red Sea, and Arabian Gulf, they said.
In conjunction with this jv, ADNOC Fertilizers has also signed a new long-term gas supply agreement with ADNOC, which will provide its facilities in Ruwais with the required feedstock for its operations based on a competitive pricing formula.
The new joint entity will be based in Abu Dhabi and incorporated in the UAE’s international financial center, the Abu Dhabi Global Market (ADGM), furthering the development of fertilizer expertise and trading in Abu Dhabi. The board of the new entity will consist of six members nominated by OCI and four nominated by ADNOC. H.E. Dr. Sultan Ahmed Al Jaber, UAE Minister of State and CEO of the ADNOC Group, will be chairman of the board.
OCI’s MENA assets include those of the wholly-owned Egyptian Fertilizer Co. (EFC), its 60 percent stake in Egypt Basic Industries Corp. (EBIC), its 51 percent stake in Sorfert Algerie in Algeria, and a global trading platform based in the UAE. The company’s MENA facilities can produce up to 3.2 million mt of gross ammonia and 2.9 million mt of urea annually. Its MENA trading platform can effectively reach a diverse customer base and has access to key distribution infrastructure.
ADNOC Fertilizers operates two plants in ADNOC’s integrated downstream complex in Ruwais in the UAE. The first plant, FERTIL-1, began production of ammonia and urea in 1983, and the second plant, FERTIL-2, became operational in 2013. The two plants have a combined annual capacity of 1.2 million mt of gross ammonia and 2.1 million mt of urea.
ADNOC Fertilizers’ key markets for its granular urea include the Indian sub-continent, the Americas, and East Africa. ADNOC is currently the sole shareholder in its fertilizers subsidiary, having acquired the 33 percent stake held by Total SA, France, in late 2018.
OCI MENA
| Assets | ||
| Plant | Location | Capacity mt/y |
| EBIC (wholly owned) | Sokhna port, Egypt | Net ammonia 0.73 |
| EFC (60 percent owned) | Sokhna port, Egypt | Urea 1.648 |
| Sorfert (51 percent owned) | Arzew Industrial Complex in Northwest Algeria near three Algerian ports | Urea 1.259 |
| Net ammonia 0.80 | ||
|
Key Financial Pro Forma Metrics 2018 |
||
| Sold own-produced volumes | Ammonia: 1.2 million mt | |
| Urea: 2.8 million mt | ||
| Revenue | $1.24 billion | |
| Adjusted EBITDA | $501 million | |
| Net debt | $698 million | |
Data source: OCI presentation
ADNOC Fertilizers
| Assets | ||
| Plant | Location | Capacity mt/y |
| Fertil-1 | Ruwais, UAE | Urea 0.830 |
| Ammonia 0.475 | ||
| Fertil-2 | Ruwais, UAE | Urea 1.270 |
| Ammonia 0.730 | ||
|
Key Financial Pro Forma Metrics 20181 |
||
| Sold own-produced volumes | Urea: 2.2 million mt | |
| Revenue | $596 million | |
| Adjusted EBITDA | $239 million | |
| Net cash | $41 million | |
1 ADNOC Fertilizers to be contributed on a debt-free basis
Data source: OCI presentation
“This partnership creates a first-of-its-kind export platform with best-in-class cash conversion metrics,” said Sawiris, who, in addition to assuming the role of CEO of the new joint entity, will remain in his current role as OCI CEO. “This platform has significant potential for future growth and value creation.”
OCI and Saudi Basic Industries Corp. (SABIC) have held talks this year about a potential sale of OCI’s methanol assets following an approach by the Saudi company (GM March 8, p. 1). OCI indicated in May that negotiations were still underway and an update may be available later this summer when second quarter earnings are released (GM May 31, p. 1). It said methanol is taking an increased amount of time for the company to evaluate all strategic options. OCI’s methanol assets are valued at $4 billion and include a 50 percent stake in the new Natgasoline plant in Texas, as well as a plant at OCI Beaumont and BioMCN in The Netherlands.
“Pooling our assets and capabilities is a value-enhancing step for both companies, allowing us to leapfrog competitors to become the top nitrogen export platform globally. It will also enable us to access new markets, benefitting both existing and new customers,” said UAE Minister of State and ADNOC Group CEO Sultan Ahmed Al Jaber.
The new business combination will improve the profitability and cash flow of ADNOC’s fertilizer portfolio, and is another milestone in the delivery of ADNOC’s 2030 strategy and ambitions to expand the group’s Downstream portfolio, he said.
The UAE group has sought to expand its downstream operations and bring in new partners to unlock the potential of its subsidiaries and expand into new international markets, and to help diversify the emirate’s oil-dependent economy.
Morocco’s phosphates giant, OCP SA, and ADNOC in May last year revealed they had agreed to explore the phased creation of a new global fertilizers jv (GM May 18, 2018). While the status of that potential partnership is unclear in the light of the latest combination plans, the OCP-ADNOC hook-up envisaged comprising two fertilizer production hubs – one in the UAE and one in Morocco (utilizing both existing and new assets) – giving the proposed jv global market reach.
Deal Gets Thumbs up from Analysts
Analysts see the planned OCI-ADNOC Fertilizers combination of assets as largely positive.
“ADNOC’s search for an international partner to transition the company to more upgraded products and increased geographical coverage is a sign the UAE wants to diversify its oil and gas and is a strategic play that others in the region may follow,” said Green Markets Research Director Alexis Maxwell. “For OCI, this deal represents long-desired global expansion growth.”
Berenberg analyst Rikin Patel told Bloomberg that it looks like “a sensible deal, which should generate commercial synergies and create a stronger export platform for nitrogen fertilizers.”
Patel said the OCI assets may be valued at around $5 billion, as it deserves a multiple of about 10 times earnings due to its superior efficiency, according to the report. According to an OCI presentation, the company’s Middle East and North African fertilizer operations generated an EBITDA of about $501 million last year.
S&P Global on June 20 upgraded its long-term issuer credit and issue ratings on OCI and its senior secured notes from “BB-” to “BB” with a stable outlook.
In its research update, S&P Global commented that it expects the recently announced jv with ADNOC “to further improve OCI’s business and financial risk through larger scale, greater diversification, substantial synergies, higher and more resilient profit margins, and stronger free cash flow generation.” The ratings company said this follows a significant strengthening of OCI’s operating performance and steep deleveraging in 2018.
The OCI-ADNOC transaction is expected to close in the third quarter of 2019, subject to legal and regulatory conditions.
J.P. Morgan acted as sole financial advisor and Cleary Gottlieb Steen & Hamilton LLP as legal counsel to OCI on the transaction. Citi acted as exclusive financial advisor and Shearman & Sterling as legal counsel to ADNOC on the transaction.