Breakingviews - Angola’s answer to Aramco has similarly tricky IPO

Resident students from Angola wave national flags as Angola's President Jose Eduardo Dos Santos's motorcade drives past after his arrival at Havana's Jose Marti airport September 20, 2007.

LONDON (Reuters Breakingviews) - Sonangol is Angola’s answer to Aramco - in more ways than one. After years of false starts, the Angolan state oil giant is on track for an IPO. As with its larger Saudi cousin, awkward questions about financial transparency and governance could yet cause a derailment.

With his recently unveiled privatisation blueprint, new President João Lourenço is taking aim at the 37-year statist grip of his predecessor, José Eduardo dos Santos. The former Portuguese colony will spin off 195 state firms by 2022, a dramatic shift for sub-Saharan Africa’s third-biggest economy and number two crude producer. The funds should help rebuild the country after a long civil war and reduce Angola’s dependence on oil exports. Besides Sonangol, whose $16 billion of revenue last year was 15% of GDP, diamond miner Endiama and national carrier TAAG Angola Airlines will also be sold.

To put it mildly, there’s some way to go. Thirteen years after stock market plans were first mooted, Luanda’s bourse is yet to admit a single listing. Although Lourenço fired dos Santos’ daughter Isabel as chairwoman two years ago, Sonangol still lacks even a functioning website. The anti-corruption and transparency bar will be higher for an international listing, and the shakiness of Angola’s kwanza currency is another issue.

Yet the potential rewards justify the hard work needed. Assume it continues to pump crude 600,000 barrels a day for the next decade, and prices hold around $70, while lifting costs creep up at 3% a year from 2018’s average of $7.5 per barrel. That produces annual cash flows, after 45% royalties and 30% tax, of $46 billion over the next decade. Discount all that back at an assumed 10% cost of capital, add in the terminal value of its earnings into perpetuity, and Sonangol has an enterprise value of $51 billion, according to a Reuters Breakingviews calculation.

Given the long-term pressure on fossil fuels, the oil price and cost of capital assumptions may be too optimistic. If crude drops to $50 by 2028, Sonangol will only be worth $38 billion. As Saudi Crown Prince Mohammed bin Salman can attest from his quest for a $2 trillion Aramco valuation, delays carry a cost.


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