Abu Dhabi National Energy Company, the partly privatised utility known as Taqa, made strides under new management last year to cut costs and refocus after some disastrous investments in North American natural gas.
But now it faces more pressure on its bottom line after the oil price collapse, particularly from its exposure to the North Sea, a high-cost and declining oil and gas province.
In November, Taqa’s chief operating officer, Edward LaFehr, reported that the company “delivered a robust operational performance” in the first nine months of the year, with oil and gas production hitting a record of nearly 160,000 barrels of oil equivalent per day, good steady cash from its power and water businesses and general and administrative costs down by 9 per cent. He also said more than Dh3 billion of debt had been paid off using the sales proceeds of non-core assets, including a stake in the private equity construction firm Carlyle Infrastructure Partners, some undeveloped land in Alberta, Canada, and a stake in the Abu Dhabi insurer Wataniya.
But the progress Mr LaFehr had made since he took over day-to-day leadership of the company from the former chief executive, Carl Sheldon, in April last year could not mask the hit the company took in the third quarter from oil prices, which had been falling since June. Revenues in the three months to the end of September were down about 6 per cent from the year earlier at just under Dh7bn, with profit down 11 per cent at Dh320 million.
That was in a quarter when benchmark North Sea Brent crude oil prices had averaged US$102 per barrel, down from $110 per barrel in the previous year's third quarter.
Now, investors are bracing for the company’s fourth quarter results, due to be reported next month, and they will most likely reflect a bigger decline in oil and gas revenues after Brent prices were 30 per cent lower during that quarter from the year earlier. And the pain continues: already deep into the first quarter, the average Brent price is even further below where it was a year ago.
For Taqa, it has been a bit like swimming upstream. Although the company has paid off Dh3bn of debt, net debt still stood at nearly Dh74bn and the ratio of net debt to net equity reported for the third quarter was barely changed from the end of the previous year, at more than 81 per cent.
The timing is not favourable. The Abu Dhabi Government’s indirect ownership of nearly 75 per cent of the company and its implied financial backing is a strength that keeps Taqa’s debt rating at investment grade and its financing costs relatively low. However, there is renewed pressure from the Government on semi-state companies such as Taqa and International Petroleum Investment Company, as lenders focus more on those liabilities at a time when government revenues are sharply lower because of oil prices.
The tolerance in Taqa’s portfolio for assets such as the North Sea, therefore, is being tested.
Since it began acquiring North Sea properties in 2008, the company has been following a “mature asset” strategy there, buying stakes and taking over operation of fields that were first discovered in the 1970s. The idea has been that while production on the fields is well past peak, the major development investment had already been made and Taqa and its partners would manage these fields by putting money into enhanced recovery efforts such as water injection to maximise output while they ran down.
But this looks less attractive now that expectations are for oil prices to recover only slowly after Brent fell to nearly $40 a barrel last month before recovering to above $50.
“The biggest risk [for Taqa in the North Sea] is oil prices where they are today and Brent averaging mid-$50s for 2015 and perhaps beyond,” says Martin Kohlhase, a credit rating analyst who follows Taqa for Moody’s Investors Service in Dubai.
“We don’t know where the breakeven prices are for Taqa’s individual projects but when the transactions were conducted we were living in an oil price environment way above where they are today, so one would have to assume they are throwing off much less cash and maybe not even be profitable.”
The signs of the North Sea’s decline were apparent in recent weeks as the big oil majors reported earnings.
This month, Royal Dutch Shell announced it would begin to dismantle the Brent oil field platform that at peak produced half a million barrels of oil a day, more than half the United Kingdom’s current output.
For Taqa, as the operator of the Brent pipeline system and a shareholder in the Sullom Voe landing terminal for Brent, that was an expected but still symbolic emblem of the UK North Sea's decline.
More to the point, Oil & Gas UK, the industry’s trade body, had on February 2, published its Business Sentiment Index showing the mood in the sector darkening considerably: on its sentiment scale, from minus 50 to plus 50, it fell last month by 16 points to minus 23.
Oonagh Werngren, Oil & Gas UK’s operations director, said the gloomy numbers “reveal serious concerns within the industry in light of the very real problems which face the UK continental shelf, including rising operational costs and a substantial drop in production efficiency. These existing problems, apparent even when the oil price was above $100 per barrel, have been exacerbated by the recent fall in oil price.”
As if to underline her point, BP in announcing its fourth quarter results, said it would take a $4.5bn charge in its accounts to bring forward the closure of some UK offshore fields because the economics of keeping them going does not make sense.
“The strategy for Taqa is they saw themselves as a niche operator, more nimble than the large international oil operators,” says Mr Kohlhase of Moody’s. “The question now becomes: how many years of life do [their North Sea fields] have and how is Taqa dealing with the double-whammy of lower oil prices and a declining province.”
Taqa executives were not available to comment on the future of their North Sea portfolio as they are waiting to announce full-year results next month.
After a first half of 2014 that saw a sharp rebound in financial results, with record gross earnings of Dh7.9bn, up 42 per cent on the previous year’s first half, and recovery in stalled North Sea operations a big factor, the second half showed that the North Sea operations face not only operational risk — which had knocked out production from one of its Cormorant fields for a long stretch in 2013 — but also commodity price risk.
That contrasts with Taqa’s Bergermeer gas storage project in the Netherlands, as well as power generation assets in Morocco, as the type of steady cash-generating projects that Mr LaFehr has highlighted as core to the company.
In Taqa’s last report it told investors that it expected to cut Dh2bn from capital expenditures this year to Dh6.8bn and would be further reviewing fourth-quarter spending.
Although the company has not officially confirmed it, knowledgeable sources say it hired the Australian bank Macquarie and the consultant group McKinsey late last year to evaluate proposed asset sales as part of an ongoing review by the company.
The question investors will want to know next month is whether the North Sea portfolio is under review and if not how Taqa expects to make money from managing these declining fields.
amcauley@thenational.ae
Follow The National's Business section on Twitter
