January 14, 2016 [OPIS] - Motiva Enterprises is a juicy candidate to take to market for a U.S. flotation as 50% stakeholder Saudi Aramco pursues its putative goal of taking itself public, investment bank Cowen and Company said in a research note.
Cowen has pegged Motiva’s theoretical market capitalization at $8.7 billion, stating a possible public valuation could be $8.5 billion-$10 billion, numbers Cowen’s equity research team of Sam Margolin, Jason Gabelman and Tanner Strunk see as “conservative.”
A Motiva IPO would have two benefits, Cowen posits: make Aramco a more palatable prospect for mainstream equity investors, and offer a “cash bridge” for Aramco’s 50% joint-venture partner in Motiva, Royal Dutch Shell (RDS), as it seeks to fill its own cash hole, estimated by Cowen at $6 billion.
Furthermore, a Motiva IPO instead of an Aramco one could lay down a marker and a precedent for further downstream divestment in the integrated oil peer group, and thus provide a “positive industry outcome,” Cowen believes.
“As Aramco explores public markets, we see Motiva as the cleanest option,” Margolin’s team wrote. “[Motiva] has a clear place in the US public markets, with 2016 representing a timing opportunity as well given what we expect to be another strong year in gasoline demand and driving season refining margins.”
Cowen’s note comes after Aramco stated last week it is considering allowing “public participation” in all or part of its equity. This elicited mixed press. Fortune magazine declared an “IPO makes no sense for Saudi Arabia,” and London financial journalist Matthew Lynn blogged an advice to Wall Street and the City to “steer clear” of any IPO despite hefty fees to be made. Other commentators have theorized that only Aramco’s refining footprint is likely to be spun off.
Margolin’s team acknowledged the credibility gap Aramco is likely to encounter in the financial world. The company, guided by the Saudi royal family, determines upstream production levels based on geo-political strategic objectives and not on its spending wherewithal. Secondly, said Cowen, profits diverted away from the sacrosanct shareholder represent an “abnormal position for equity investors,” which makes an Aramco upstream IPO in particular a challenging prospect.
However, Cowen notes a “managed conflict of interest” between Aramco and Motiva in the U.S., where Motiva’s diet of crude oil has been “typical of an independent refiner.” Since the completion of the Port Arthur, Texas, expansion in 2013, making Motiva the nation’s biggest refiner, Saudi imports into the facility have dropped by almost half, from 450,000 b/d to 240,000 b/d as of last September. Though one can argue this volume is still high, Cowen believes Motiva’s “crude behavior will be attractive to U.S. investors.”
Cowen sees Motiva’s geographical space as an added advantage. “We believe Gulf Coast refineries will remain outperformers in equity markets in 2016 and are strong candidates for IPO[s],” said Cowen, citing consumer confidence and gasoline demand as wider factors. “Additionally, we expect WTI to reach a premium over Brent as U.S. crude production declines, while light/heavy crude spreads widen as well. This commodity view favors Gulf Coast refineries with flexibility to import cheaper feedstock.”
From RDS’ perspective, it is coping with its ongoing merger deal with BG, and has $30 billion of divestments on the agenda through 2018. Cowen sees a dividend-inclusive funding gap of $6 billion, and sees a Motiva spinoff as an effective remedy for RDS to scratch together some of this cash. RDS would benefit even if it retains a post-flotation Motiva stake, especially if the latter starts paying dividends, Cowen argues.