Kuwait Stock Exchange too small to manage major IPOs
Low liquidity and poor valuations on the Kuwait Stock Exchange (KSE) are likely to mean that major privatisations in Kuwait involving initial public offerings would have to dual list on a larger exchange.
The four subsidiaries of Kuwait Petroleum Company which are being considered for 20 to 30 per cent stake sales, Kuwait Petroleum International (Q8), Kuwait Foreign Petroleum Exploration Company (Kufpec), Kuwait Oil Tanker Company (KOTC) and Petrochemical Industries Company (PIC), are expected to be worth billions of dollars.
The KSE has a market capitalisation of about $80.5bn, but of 199 listed stocks, only 107 actively trade. 24 companies have announced plans to delist. Trading volumes and valuations have been in decline since 2014.
The problem is listing outside Kuwait could be politically unpopular.
If the companies are listed, I would be surprised if they didnt offer something on the KSE, says Ankit Gupta, vice-president research at Dubais Shuaa Capital. But to achieve broader shareholding base and ensure enough appetite for these assets, I would expect a dual or triple listing, in New York, London or Asia, as suggested by Saudi Aramco. These assets are world-class and we would expect global interest in any such listing.
Saudi Arabia is using the planned Saudi Aramco IPO to bring in foreign investment and boost the profile of the Saudi Stock Exchange (Tadawul) as it seeks MSCI emerging markets status. The KSE could be given a similar, though smaller, boost.
KPC could also bring in strategic investors, who could support the financing of future expansion projects.
Kuwait is starting by privatising refining assets, and they have plans to increase their refining capacity, says Gupta. This could bring in a new, diversified investor base for downstream assets.
Kuwait is focusing on downstream assets for partial privatisation, such as Q8 and PIC. PICs largest operating company is Equate Petrochemical Company, a joint venture with the US Dow Chemicals.
Dows 2014 decision to reduce its 42.5 per cent stake in Equate and its subsidiaries could also be a driver behind PICs privatisation. Equates subsidiaries are major global producers of styrene and ethylene, with production of 1233 tons a day and 1 million metric tons a year respectively. Equate should be attractive to investors if it can maintain its competitiveness as petrochemical margins are compressed.
The main motives for the planned stake sale include increasing the efficiency of Kuwaits oil and petrochemicals sector to better compete globally, and managing falling government oil revenues.
The government is trying to find extra cash, and improve efficiency at the same time, says Jason Tuvey, Middle East economist at London-based Capital Economics. Selling off certain parts, rather than the whole, makes sense, as KPC can then focus on production.
The subsidiaries being considered for privatisation either operate primarily outside Kuwait, or in adjacent sectors such as oilfield services and petrochemicals.
Only privatising downstream assets will mean that KPC can avoid investor scrutiny and control, unlike Saudi Aramco, which may sell shares in the main national oil company. This will allow Kuwait to continue setting production levels based on national interest rather than commercial logic.
Kuwait also has a less urgent need to raise cash in the short term to plug budget deficits than other GCC countries which have higher populations and lower financial and hydrocarbon reserves.
Kuwait is one of the best-placed GCC countries to deal with low oil prices, says Tuvey. They could run a small deficit this year and then return to a surplus next year.
The National Bank of Kuwait expects the fiscal deficit to be 6.2 per cent of GDP at most in the 2015/16 financial year, then drop to below 4 per cent in the next two years. Kuwaits sovereign wealth fund, the Kuwait Investment Authority, also has assets estimated at 400 per cent of GDP.
Kuwait has set itself a four-year timetable to carry out the KPC privatisations. However previous attempts at privatising state-owned companies over the last six years, such as Kuwait Airways, have stalled amid numerous attempts at establishing a framework. Kuwaits National Assembly, the strongest parliament in the GCC, could slow or even block the sale of oil sector companies if it sees it as against Kuwaiti national interest.
Nevertheless the announcement is part of a wider trend of privatisations in the GCC moving beyond the planning stages, in response to expectations of a long period of low oil prices.
Saudi Arabia took the bull by the horns with the Aramco IPO, but I wouldnt be surprised if we saw more downstream privatisations, says Tuvey. With low oil prices, governments are looking at what they can monetise.
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