Taqa has an aggressive acquisition strategy that is targeting assets in the Middle East, Africa, Asia, North America and Europe, Peter Barker-Homek, Chief Executive Officer of Taqa, tells Financial Review
The Abu Dhabi National Energy Company (Taqa) is the emirate's majority power generation and water desalination company, and the government intends it to serve as a primary conduit for Abu Dhabi's strategic investments in the global energy and capital markets.
What is the current division of Taqa's various activities - power, water desalination, oil and gas?
Right now the majority of our business is providing energy and water to customers in Abu Dhabi. Since 2006 we have expanded our operations and investments in the oil and gas, power and water generation and infrastructure sectors across the Middle East, North Africa, India, Europe and North America. In terms of revenues it's not appropriate to give a breakdown at this stage.
Increasingly Taqa is going more for international acquisitions. What is the ratio between domestic and international operations? And which region contributes the most in terms of revenue?
At the end of the third quarter this year, our international mix was around 87.5 per cent domestic and 12.5 per cent international in terms of the value of assets.
Taqa is present in 10 countries around the world if you include the UAE, and at the end of the third quarter had a collection of energy assets exceeding $16 billion.
At the beginning of the year almost all our assets were in the UAE, with over 95 per cent being domestic assets. So in terms of our geographical portfolio mix, going from one to 10 countries shows how far we have come in a short time.
Looking at how we have moved this year, we have the establishment of our European upstream and midstream oil and gas operations, with the $550 million acquisition of Talisman Energy's Brae assets, and the $694 million acquisition of BP Nederland in January.
In May we established power generation operations outside of the UAE with the acquisition of CMS Generation and ABB's interests in assets in Africa, the Middle East and India. In August we made our entry to the strategically important Canadian market with the purchase of Northrock Resources.
What you have seen so far, however, is not the full story. On the one hand we expect domestic assets to continue to increase year-on-year over the next five years. On the other hand we expect to continue investing in assets that are in line with our acquisition strategy and, of course, meet our acquisition criteria.
In terms of where we are aiming to be, by 2012 we aim to have a geographical mix of 65 per cent domestic and 35 per cent international, on total assets in the $40 billion to $50 billion range.
You mention acquisition strategy and criteria - what are they?
Our ambition is to become a truly international energy company, with a significant part of our assets being based outside our domestic market. To help us get there, Taqa has an aggressive acquisition strategy that aims to acquire assets in the Middle East, Africa, Asia, North America and Europe.
We aim to have a diversified portfolio that has strong representation at every stage of the value chain, from wellhead to burner tip.
Our acquisitions are in target markets that have limited market, price and volume risks but significant resource potential. They must be high quality assets with existing cash flows, and must demonstrate an ability to significantly enhance the Group's operational expertise.
I'd like to give you an idea of how rigorous our acquisition process is. As you would imagine, we see a lot of opportunities coming through the door on a regular basis. If we were to see 100 opportunities, we would filter these down in the initial stages down to around 10.
We would then conduct initial due diligence on these assets and have a shortlist of two to three assets where we would enter into negotiations. Of these we would end up buying one.
Could you explain the operating framework that includes offtake agreement with the Abu Dhabi Water and Electricity Co.? That reduces most of the risk but what are some of the other operating risks, if any?
The operating framework in Abu Dhabi differs depending on the asset. Generally, however, generated electricity and water is procured by ADWEA, which is a government entity that clearly will meet its commitments.
This contract is supported by a very comprehensive agreement, which effectively means that the government guarantees the termination payment due by ADWEA for the power and water it procures from Taqa. This means our commitments to creditors are guaranteed by the government.
Other operating risks are, as for with any international energy company, include things like interest rate movements, or exchange risks.
Could you explain the different operating frameworks under which you work in other countries, and the risks involved? What steps are you taking to minimise the risks?
The operating frameworks in the ten countries in which we operate are, as you would imagine, different. In other geographies, of course, the agreements we have are legacy agreements made prior to Taqa acquiring the asset.
We are not in the position to discuss them in any detail, but of course, our risk management techniques are similar the world over, by us and by other international energy companies, and include methods like hedging against detrimental moves in interest rates, exchange rates and oil prices.
To whom is Taqa selling its 41,000 barrels per day crude output? Is all of the crude oil being sold at the prevailing market prices, or are you offering some off-takers discounts too?
Taqa's customer base is very diverse and depends on whether it is upstream, mid-stream or downstream business. For example, upstream, or exploration and production (E&P) our customers include various refinery businesses.
In our mid-stream business, gas processing, for instance, our customers include highly rated corporates and government entities.
ADWEA is a local example of a mid-stream customer. Our downstream businesses, power generation and desalination for example, sell their products to government entities in each market. Generally speaking, we sell our products at market rates.
You previously said the average cost of Taqa's oil production is $7 per barrel. Does that mean that at $90 per barrel on the international market your net profit margin per barrel of crude sold is $83 per barrel?
This isn't how the market works. Operating costs per barrel catch up with the market prices because everyone in the value chain, suppliers and contractors for instance, adjust their prices to the prices of oil.
Naturally there is a bit of a lag - suppliers and contractors take time to react with price changes. When you have higher oil prices you have more assets that become more exploitable economically, there is more activity, greater demands on talent and resources, which increases operating expenses up in line with the increased revenues.
Taqa's crude is benchmarked to the prices of which grade of crude: sweet or sour?
For the grade, this differs market by market, so there is no one-size fits all answer. In terms of where we benchmark our prices, again this depends greatly on where the operating business is.
For example, in the UK, Taqa crude is benchmarked to Brent. In Holland it's benchmarked to the Dutch index. In Canada it's benchmarked against the Fosterton and WTI indices.
You previously spoke about giving higher dividends for your shareholders, given the windfall profits of the company. Can you detail your dividend policy?
Last year's dividend represented five per cent of the share capital. Total cash distribution was Dh207.5 million. While Taqa is going through an aggressive growth phase, and investing much of its profits back into the business, with the aim of rewarding shareholders with greater growth, the dividend policy for 2007 will remain largely in line with 2006.
Of course, these numbers will be announced when we report out full year 2007 results.
Your company recently acquired PrimeWest Energy for C$5 billion and the Canadian Prime Minister has signalled the government will not block the deal. Would you please apprise us of the latest situation there and how long it would take for the deal to formally go through?
I don't want to discuss any details of this deal until there is something new for us to tell you. In terms of where the deal stands right now, on September 24, Taqa announced that it had agreed to acquire all of the issued and outstanding exchangeable shares of PrimeWest.
The deal is subject to regulatory review, as would be the same with any deal in any sector, and once the outcome of that regulatory attention is known, the company will update the market.
What I can tell you is that PrimeWest is an open-ended investment trust that is listed on the Toronto stock exchange. The principal undertaking of the Trust's operating companies is to actively acquire, develop, produce and sell natural gas, crude oil and natural gas liquids for the generation of monthly cash distributions to its unit holders.
Its production is approximately 70 per cent gas and 30 per cent oil. Its current output is around the 61,000 barrels of oil and oil equivalent per day mark. PrimeWest has over 285 million barrels of proven or probably reserves.
After the latest acquisition is complete, what would the impact be on Taqa's size and key data and ratios?
Subject to regulatory approval of the acquisition, the addition of PrimeWest would mean the total assets of Taqa increase to $20 billion. One of the most overlooked elements of this, and any other acquisition that Taqa makes, is the management teams that would come into the Taqa family.
The companies we have acquired so far have some of the most respected and experienced industry executives anywhere, and this is a vital part of the Taqa jigsaw as the company continues to realise its goal of becoming a leading global energy business.
Does the Taqa share price concern you?
The market decides the value of Taqa's shares, and it is not for me to comment on what that value is or should be. Of course, it is my role as CEO to do my best to ensure that the market has all the information it requires to reach an informed view on the company's value, and this is one area that Taqa is focusing on.
We are making improvements in our transparency to ensure investors in the UAE and internationally get what they need.
Taqa said recently it has signed a letter of intent with Kuwait Energy Company to jointly explore opportunities in the upstream oil and natural gas sector in Egypt, Oman, Yemen, Syria, Iraq, Kazakhstan and Iran. What are the expectations in terms of Taqa's investment commitments?
There are no capital commitments at this stage. The agreement that has been made between Taqa and KEC signal an intent by the two to work together to build a portfolio of assets focused on mature producing, development and exploration assets.
Interview by Himendra Mohan Kumar, Staff Reporter, and Gaurav Ghose, Financial Reporter
