The UAE’s Abu Dhabi National Oil Company (Adnoc) has entered a strategic partnership with US-headquartered Baker Hughes, a GE Company (BHGE), that will lead to the creation of an oil construction-focused business. The agreement will see Adnoc subsidiary Adnoc Drilling evolve into “a fully integrated drilling and well construction provider”, worth $11bn (AED40.4bn).
As part of the agreement, BHGE will be the sole provider of “certain proprietary leading-edge and differentiated equipment and technologies related to the integrated drilling offering”, according to a statement. The agreement marks the first time that Adnoc has invited an international partner to acquire a direct equity stake in one of its service businesses.
Adnoc and BHGE are expected to deliver “more competitive well completion times, greater drilling efficiencies, and better well economics” following the partnership agreement. Operations will commence in 2019, and the commercial framework accounts for BHGE’s working capital requirements and equipment lead times, including milestone payments.
BHGE will acquire a 5% stake, worth $550m (AED2bn), in Adnoc Drilling through the transaction. The subsidiary’s $11bn evaluation includes approximately $1bn (AED3.67bn) of net debt. The transaction also includes an activity- and milestone-based deferred consideration mechanism starting in 2023.
Adnoc Drilling will remain the sole rig provider of Adnoc Group Companies and deploy its new offering to capture up to 30% of the drilling and completion market over the next three years.
The partnership will see Adnoc come closer to its target of a 30% reduction in drilling time by the end of 2019. Meanwhile, BHGE will receive a seat on Adnoc Drilling’s board of directors, and an advisory board with representation from both companies will be established to oversee the agreement’s implementation and ongoing operations.
Transaction closure is expected in Q4 2018, subject to customary closing conditions, including appropriate regulatory approvals. Moelis & Company is acting as exclusive financial advisor to Adnoc, and Citi is acting as advisor to BHGE.
In a statement, Adnoc said the drilling subsidiary is expected to generate “stable annual dividends, with an estimated long-term yield in the range of 7% per annum for both shareholders”.
Commenting on the partnership, HE Dr Sultan Ahmed Al Jaber, the UAE’s Minister of State and Adnoc Group’s chief executive officer, said: “We chose BHGE after a rigorous and competitive process as a partner with whom we have a long-standing working relationship and who shares Adnoc’s long-term vision and values.
“This unique partnership with BHGE comes at an important time in the drilling needs of Abu Dhabi as Adnoc grows its conventional and unconventional hydrocarbon resources and as we see future potential for further regional growth.
“The combined capabilities and expertise from this partnership will create greater drilling efficiencies and faster well completion times, generate attractive returns and enable the transfer of know-how and access to technology. Importantly, it will also drive job creation and economic growth, as well as maintain a healthy level of competition in the dynamic UAE oilfield services market,” Al Jaber continued.
Lorenzo Simonelli, chairman and chief executive officer of BHGE, added: “We are very pleased to take a minority stake in Adnoc Drilling to jointly develop and further grow the company’s technical capabilities, market access and value.
“[The agreement] allows us to drive predictable revenue streams and long-term growth for both companies, and lets us invest in a stable, reliable, and secure market environment.”