Taqa puts brake on 3 years of spending

The Abu Dhabi National Energy Company announces a major strategy shift as it plans to lower debt burden and cease acquisitions.

The Abu Dhabi National Energy Company, or Taqa, announced a major change in strategy yesterday as profits disappointed investors just weeks after the company replaced its most senior executive. Having spent three years on a US$24 billion (Dh88.15bn) global spending spree, the government-controlled company will now concentrate on existing operations and reduce debt.

"We will shift our focus from growth by step-out M and A [mergers and acquisitions] to organic growth from our existing assets," Carl Sheldon, the newly appointed general manager of Taqa, said yesterday, laying out his plan to turn the company around. "We've now got a suite of internal investment opportunities that will allow us to grow the business without further acquisitions." The about-face came as Taqa posted an 88 per cent decline in profits for the third quarter, which was attributed to lower oil prices and higher costs. Net earnings for the three months that ended on September 30 this year were Dh90 million compared with Dh723m for the same period a year ago.

Mr Sheldon said Taqa would spend about $3bn on existing projects over the next four years. A planned expansion of a Moroccan power plant to 1,350 megawatts from 700mw is set to begin in the first half of next year, with completion scheduled for the second quarter of 2013. Another strategic goal was to cut the debt-to-capital ratio of Taqa, among the most indebted Abu Dhabi companies, to 70 per cent within three to five years, Mr Sheldon said. That ratio stood at 84 per cent last quarter, down from a peak of 88 per cent in the fourth quarter of last year.

Mr Sheldon described the change in corporate strategy as "evolutionary" rather than an abrupt about-face. He also said the company might continue to make modest acquisitions that fit its existing portfolio. The new-found fervour for consolidation follows explosive asset expansion under Peter Barker-Homek, the former Taqa chief executive who left the company last month. Taqa gave no reason for his departure. The company invested heavily to acquire a portfolio of energy assets on four continents during his tenure.

From its roots as an operator of Abu Dhabi power plants, the company diversified into oil and gas production in Canada and the North Sea, gas storage in Holland and electricity generation in India and the Caribbean. At the height of the oil boom last year, as crude headed towards a record $147 per barrel, Mr Barker-Homek talked about building a $60bn asset portfolio for Taqa. The credit crunch and global recession soon intervened.

The departure of Mr Barker-Homek came amid rapid deterioration in the financial performance of Taqa as the effects of sharply lower commodity prices impacted its bottom line harder than on those of many more seasoned oil and gas producers. Not only did third-quarter earnings drop, but revenue fell 13 per cent to Dh3.9bn from the same period a year earlier as a one-third decline from oil and gas activities more than offset a smaller gain from electricity generation.

Hala Fares, an analyst at Shuaa Capital, said the slide in oil and gas revenues at Taqa was larger than expected, even taking lower oil and gas prices into account. The company's third-quarter cost of sales rose 9 per cent and its administrative expenses also increased. The higher sales costs were related to acquisitions, the company said. Expansions of two UAE projects, rather than more recent overseas acquisitions, accounted for most of the increase in power and water revenue last quarter.

Doug Fraser, the Taqa chief financial officer, said the company would consider launching a bond issue in Canada next year to refinance part of a C$1.3 billion (Dh4.58bn) credit facility that is due for renewal in July next year. [e-mail]