The world according to ENOC, Jebel Ali & more

If you could think of one participant in the Dubai economy that exemplifies a bit of a detachment from its debt fuelled construction boom turned bust, then the Emirates National Oil Company (ENOC) is certainly it. The Oilholic has always been one for contrasting Dubai’s debt fuelled growth with neighbour Abu Dhabi’s resource driven organic growth. However, ENOC is a somewhat peculiar exception to the recent Dubai norm or some say form.

 

Since becoming a wholly owned Government of Dubai crown company in 1993, ENOC has continued to diversify its non-fuel operations while playing its role as a custodian of whatever little crude oil reserves the Emirate holds. The history of this NOC dates to 1974. Today it is among the most integrated (and youngest) operators in the business, though not necessarily profitable in a cut throat refining and marketing (R&M) world.

 

While it has no operations in neighbouring Abu Dhabi, ENOC has moved well beyond its Dubai hub establishing a foothold in 20 international markets and other neighbouring Emirates over the years. In case, you didn’t know or had never heard of ENOC, this Dubai crown company has a majority 51.9% stake in Dragon Oil Plc; a London-listed promising upstart. Dragon Oil’s principal producing asset is the Cheleken Contract in the eastern section of the Caspian Sea under Turkmenistan’s jurisdiction.

 

Despite trying times for refiners ENOC’s Jebel Ali Refinery, situated 40km southwest of Dubai City, is the crown company’s crown jewel. Planned in 1996 and completed by 1999, the Jebel Ali refinery’s processing capacity currently stands at 120,000 barrels per day (bpd). It processes condensate or light crude to myriad refined products which get exported as well as feed in to ENOC's own domestic supply chain.

 

ENOC says an upgrade of the refinery was carried in 2010 at a cost of US$850 million. The refinery dominates the landscape of the Jebel Ali free trade zone accompanied by a sprawling industrial estate and an international port. The Oilholic is reliably informed that the latter is among the largest and busiest ports in the region playing host to more ships of the US Navy than any other in the world away from American shores.

 

While being able to host aircraft carriers is impressive, what’s more noteworthy from a macroeconomic standpoint is the fact that the Jebel Ali Free Trade Zone as a destination exempts companies relocating there from corporate tax for fifteen years, personal income tax and excise duties. It’s a privilege to have visited Jebel Ali and also by ‘crude’ coincidence witness ENOC sign a joint venture agreement with Saudi Arabia’s Aldrees Petroleum & Transport Services Company (Aldrees) for setting up service stations in different locations across the latter.

 

The equal-staked venture will see service stations in Saudi Arabia feature ENOC’s regional marquee brand products. The first station is expected to open early next year, with the number of sites rising to 40 in due course. Given that ENOC needs to buy petroleum from international markets as Dubai does not produce enough of the crude stuff, the move has much to do with cost mitigation on the home front.

 

ENOC is forced to sell fuel at Dubai petrol pumps well below the price it pays for crude and refining costs. For instance, over 2011 fuel sales losses at ENOC were thought to be in the US$730-750 million range. So here’s a NOC with profitable non-fuel businesses but troubling fuel businesses looking for ‘crude’ redemption elsewhere. That’s all for the moment folks; a final word from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: ENOC Bur Dubai Office, UAE. Photo 2: Jebel Ali Refinery and Industrial Estate, Dubai, UAE © Gaurav Sharma 2012.

IOC’s bonds, Dragon's shares & Shell’s spill

The Indian Oil Corporation Ltd (IOC) issued its much talked about bonds to the tune of US$500 million last week, with a 5.625% rate due in 2021 to fund ongoing and future domestic projects. Banking on the premise of burgeoning demand among other metrics, ratings agency Moody’s gave it a Baa3 rating with a stable outlook.

Through its 10 refineries with a combined capacity of 1.2 million barrels a day, IOC is India’s largest downstream company with a near 40% market share. While it is a publicly listed company, the Indian government owns 78.92% of it. From an Indian majority state-owned behemoth to a LSE-listed upstream company 51% owned by the government of the Emirate of Dubai – Dragon Oil – which was brought to the Oilholic’s attention recently.

Dragon’s share price is nowhere near its own 52-week high of 609p, but past few trading sessions following its H1 interim results have seen its price rise nearly 4% or 20p on average to about 490p in a decidedly bearish environment. (For the record, it is not the biggest LSE-listed riser of the day – that accolade goes to Heritage Oil but that’s a story for another day).

Question is do you buy it? Examining past performance seems to suggest so and Dragon has recorded a 25% average (gross) production growth for H1 2011. Furthermore, the upstream co has set itself a rather ambitious production growth target of 20% on an annualised basis for the year.

For 2011-2013, the company seeks to maintain target of average annual production growth in the range of 10% to 15%. Away from production projections and by force of habit the Oilholic always looks at the EPS which is up 125% year over year for the first half of this year. Additionally, it remains a takeover target for the majority owners (among others).

The Dragon’s central plank or prized asset is prospection in the Cheleken, an offshore Turkmen jurisdictional area in the eastern section of the Caspian Sea. This can be further narrowed down to an operational focus on the re-development of two oil-producing fields - Dzheitune (Lam) and Dzhygalybeg (Zhdanov).

On the ground Dragon looks promising; on paper it looks a shade one-dimensional. From an investor’s standpoint, that would make its shares a reasonable medium term investment. The Oilholic is always partial to the idea of going long; hence Dragon’s shares are appealing within reason.

Moving on to an offshore story of a grave kind, Royal Dutch Shell confirmed that a leak in a flow line leading to the Gannet Alpha oil platform, east of Aberdeen, Scotland, found on Wednesday is “under control with leakage considerably reduced.” According to local sources, a Remote-Operated Vehicle (ROV) has been deployed for inspection checks and to monitor the subsea leak.

Admittedly not much is coming out in terms of information, except for Shell’s claims that the oil would disperse naturally and not reach the UK coastline. The Oilholic finds the lack of information to be frustrating and sincerely hopes Shell is not doing a BP style “underestimation”. At this point there is no reason to believe that is the case.

Finally, both WTI and Brent are in the green up 1.83% and 1.31% in intraday at 15:15GMT. The bears are still in Crude town, but quite possibly taking a breather after last week’s mauling, or as Commerzbank analysts note, “Even if the short term trough appears to be reached, weak physical demand should keep oil prices in check.”

Update 16:45 GMT: Latest estimates from Shell’s press office suggest 216 tonnes or 1,300 barrels had been spilled.

Update 10:30 GMT, Aug 16: Shell says additional leakage has been discovered in the flow line beneath Gannet Alpha platform

© Gaurav Sharma 2011. Photo: Dzheitune Lam Platform B © Dragon Oil Plc.