Saudi Aramco Approves Its First Investment in Russia. The Small Deal May Become a Breakthrough for the Admission of Saudi Investors to the Russian Market
Saudi Aramco, the Saudi state-owned oil company, together with RDIF, will buy out RUSNANO’s stake in the oilfield service company Novomet. The deal, worth less than $200 million, will be the first investment of Saudi Aramco in Russia
Saudi Aramco, one of the world’s largest oil producers, the Saudi Arabia Public Investment Fund (PIF) and the Russian Direct Investment Fund (RDIF) have signed binding documents on the purchase of 30.76% of the oilfield service company Novomet from RUSNANO. This was announced on October 14 at the Russian-Saudi Investment Forum in Riyadh in the presence of Russian President Vladimir Putin and King Salman bin Abdulaziz Al-Saud of Saudi Arabia.
The amount of the deal is not disclosed by the parties. But the minutes of the bilateral intergovernmental commission on trade, economic and scientific-technical cooperation, which met on the eve of the forum in Moscow in early June, say that the joint project of Saudi Aramco, PIF and RDIF on the production of oil-submersible equipment (it is just what Novomet is doing) approximately costs $659 million. This amount does not include the company’s debt of about RUB 20-25 billion, according to two sources close to the different parties to the deal. Thus, RUSNANO may sell its stake for $200 million (RUB 12.8 billion at the exchange rate of the Central Bank of Russia as of October 14), or, taking into account the debt, for about RUB 7 billion. RUSNANO’s Board of Directors approved a minimum estimate of RUB 7.5 billion for the Novomet shares in spring.
First Saudi Aramco deal in Russia
The deal with Novomet will be the first joint investment of RDIF and Saudi Aramco within the framework of the $1 billion energy platform created in 2017 with the participation of PIF. It is aimed at investing in the Russian energy sector with the possibility of further localizing the business in Saudi Arabia and the Middle East, a representative of RDIF said. “This is the first investment with Saudi Aramco not only within the framework of the joint energy platform, but also in Russia in general,” RDIF General Director Kirill Dmitriev stated.
The transaction will be completed after obtaining the approval of the Federal Antimonopoly Service (FAS), RDIF’s statement reads. A consortium involving RDIF and Saudi Aramco and PIF filed its first application for the purchase of a Novomet stake, an application for clarification, back in February 2019, and the second one (for the approval of the transaction) at the end of September. “The applicant was asked to provide additional information. The application is under consideration,” a representative of the Federal Antimonopoly Service told RBC. The deal is expected to be completed by the end of the year, according to one of the interviewees of RBC.
The sale of a stake in Novomet to Saudi Aramco is a tentative action to allow investors from Saudi Arabia to enter the Russian market, Maxim Khudalov, Senior Director of ACRA, said. “The relations between both countries have been improving, and perhaps we will see more Arab money in Russian projects,” he added. Earlier, Saudi Aramco expressed interest in buying a stake in NOVATEK’s Arctic LNG-2 natural gas liquefaction project, intending to invest up to $5 billion, but the parties did not reach a final agreement. An additional condition of the deal with Novomet shares may be the admission of this Russian company to the Saudi Arabian market, the expert believes.
Pumps for Saudi Arabia and the Middle East
Novomet, with its two industrial sites and headquarters in Perm, is engaged in the production of oil-submersible equipment and drilling services for oil companies in Russia and abroad. According to the RDIF, the company is the sixth largest supplier of oil production solutions in the world (3.9% of the global oilfield service equipment market).
RUSNANO, together with Baring Vostok and Russia Partners, invested in Novomet in 2011. Since then, the state company has invested RUB 3.92 billion directly in the project, and the funds were buying the shares of the founders, a representative of RUSNANO says. Now, the six founders own 49.9% of the company, and Baring Vostok and Russia Partners have less than 20%. “Over the last nine years, with the participation of RUSNANO, Novomet has evolved into one of the leaders in the Russian oilfield service equipment market and entered the world market top 10. RUSNANO’s investments allowed the company to modernize the Perm manufacturing site of submersible pumps for oil production, to increase revenues by a factor of 3.5, up to RUB 23.2 billion, to expand the international network of equipment supply to 25 countries and to open 12 service centres for equipment maintenance worldwide,” RUSNANO Management Company Board Head Anatoly Chubais (his words are quoted in the message) reported.
A. Chubais expects that the participation of a strategic investor in Novomet, Saudi Aramco, one of the world’s largest oil producers, will strengthen the high status of the Russian company in the international oilfield services market and give a new impetus to its development. RDIF, in partnership with Saudi Aramco and PIF, intends to significantly expand Novomet’s business in Saudi Arabia and other key markets in the Middle East, Dmitriev confirmed. He adds that Novomet will be able to expand its portfolio of orders for the production and maintenance of equipment, and will also have the opportunity to further develop and create an updated product line.
This is not the first attempt to attract a strategic investor to Novomet. Previously, 100% of Novomet was going to be purchased by the American oilfield service company Halliburton, but, in early 2018, it withdrew its application from the FAS. At that time, Igor Artemyev, the head of FAS, suggested that Halliburton was waiting for a new wave of sanctions against Russia, and the Americans could just feel that, in this situation, they no longer needed anything of the kind. “If we compare it with the deal with Halliburton, which was a strategic investor with a premium for 100% of Novomet, then the consortium with the participation of Saudi Aramco and RDIF acts more as a financial investor,” an RBC source close to one of the parties to the deal said. Nevertheless, even having agreed to sell shares to this consortium, RUSNANO could earn more than RUB 3.5 billion from this investment.
“Baring Vostok is not planning to participate in the deal with Saudi Aramco and RDIF, but is considering the possibility of selling its stake in the company and is negotiating with potential buyers,” the Investment Fund spokesman told RBC.
Novomet has steadily grown in recent years and has had access to international markets (40% of revenue came from exports), so Saudi Aramco’s interest in the company is clear, Khudalov notes. He believes that taking into account the growth of the order portfolio, the return on investment for new shareholders may be up to three years. About half of Novomet’s revenue comes from abroad, mainly from the Americas, Danila Shaposhnikov, a partner at TerraVC Investment Company, confirms. Entering a new region (the Middle East) is within the logic of Novomet’s development strategy: the company has been actively diversifying its business and launching new high-tech oilfield services.