Structure

First Energy Bank (FEB), a Bahrain-licensed wholesale bank operating under Islamic principles, was created in June this year with paid-up capital of $1bn. Its founding shareholder is Gulf Finance House (GFH). Its mandate is to offer finance to companies operating within energy markets in the GCC, Asia and North Africa.

Based in Manama and operating as a joint stock company, FEB’s main shareholders comprise heavy-weight investors from across the GCC and North Africa. No single shareholder holds more than 10 per cent of the bank’s stock.

Company snapshot
Date established July 2008
Main business sectors Sharia-compliant investment banking, focusing on the energy sector
Main business regions Middle East & North Africa, Southeast Asia
Chairman Esam Yousif Janahi

FEB aims to be world’s first Islamic investment bank that is wholly focused on the energy sector. The bank has a sharia supervisory board and a board of directors comprising 13 members who sit on three board-appointed committees: executive and investment; audit and risk management; and remuneration, nomination and governance.

FEB named two new senior executives in October 2008. Mohamed Shukri Ghanem was appointed deputy chief executive officer (CEO) – chief investment and business development officer; and Mohammed al-Nusuf was named deputy CEO – chief placement officer. Ghanem brings a specialisation in North African financings. He is a son of former Libyan prime minister Shukri Ghanem, who is CEO of state energy company National Oil Corporation (NOC).

Operations

FEB’s core activity in energy includes direct equity investments, the acquisition of shares in private companies, Islamic finance, financial advisory services and asset management.

FEB will act as investor, financial partner and adviser for projects and transactions in a range of energy-related sectors.

Regional companies that already serve the energy sector, but lack the necessary resources to expand, will also be targeted for investment.

This remit reflects the priorities of the bank’s key backer, GFH, which has sought to set up new financial institutions specialising in sectors including telecoms and infrastructure.

The energy sectors FEB is targeting include oil and gas exploration, production, processing, transport, storage and refining, as well as oil field services, petrochemicals, electric power and alternative energy.

Ambitions

FEB has set itself a target of generating a net profit of $107m and a return on investment of 11 per cent in its first year of operation, although this target was announced before the worst of the global liquidity crisis. The bank’s investment activities will cover five main areas.

The first is energy development projects, consisting of equity investments and underwriting for new energy projects that are in the early stages of development, where the bank can act as principal or joint venture partner.

Equity positions in these projects may be subsequently syndicated through a private offering or offered to the public through an initial public offering (IPO) within two years of initiating a successful development opportunity. These projects are expected to yield the highest rates of return to the bank. It will also co-invest in early-stage development projects alongside strategic investors that will lead and manage the development activities.

Another area of investment activity is acquisitions of business lines or portfolios of assets that are non-core to companies, or acquisitions of those banks that need to divest due to financial constraints.

Corporate acquisitions are another key area of investment for FEB. This activity will focus on acquisitions of public or private companies that are wrongly priced or undervalued in their market, and where value can be added through more efficient structuring.

In addition, FEB will look at mezzanine capital opportunities – exploiting potential funding gaps – that provide a stable risk-return profile. This area of investment will be explored for larger transactions where there are gaps between senior international debt, Islamic debt tranches and debt maturities.

The company’s first major foray has been to form a new offshore drilling and services company, Menadrill, announced in July this year. This is an ambitious bid to found a home-grown Middle East oil field services outfit to capture growing demand for oil and gas drilling.

FEB is considering a listing in Bahrain, although a flotation on the UAE or Kuwait bourses is also possible within the first few years of operation.

MEED assessment

FEB’s aim is to capitalise on the energy sector’s demand for investment. Esam Janahi, chairman of FEB, quotes the International Energy Agency’s estimates for energy infrastructure capital expenditure requirements in the Mena region as exceeding $56bn a year from now through to 2030. These figures indicate that there is space for a well-connected, specialist investment bank to put together tailored financing solutions to the industry.

The presence of prominent Gulf investors, particularly GFH, suggests the bank’s confidence is well-founded. FEB’s offering of capital and industry expertise, tapping into respected strategic partners such as the US’ PFC Energy, should reap rewards. The bank’s sharia compliance provides another layer of specialisation that may attract Mena clients.

However, FEB’s confident forecasts about the potential size of the Mena energy bounty is open to challenge.

Major shareholding companies:

  • Abu Dhabi Water & Electricity Authority

  • Bahrain Islamic Bank

  • Capital Management House

  • Dubai Investments

  • Emirates Islamic Bank

  • Gulf Finance House

  • Al-Jaber Trading & Contracting Company

  • Al-Khaleeji Commercial Bank

  • Libyan Investment Authority

  • Tasameem Real Estate

  • Major shareholding companies:

  • Abu Dhabi Water & Electricity Authority

  • Bahrain Islamic Bank

  • Capital Management House

  • Dubai Investments

  • Emirates Islamic Bank

  • Gulf Finance House

  • Al-Jaber Trading & Contracting Company

  • Al-Khaleeji Commercial Bank

  • Libyan Investment Authority

  • Tasameem Real Estate

The bank’s success depends on the appetite of private developers to continue to seek capital and development advice in what may be less favourable economic circumstances than over the past few years. The FEB model is based on the assumption that energy prices will remain high, allowing investors to target long-term returns.

Should the price climate prove less positive, that model may need to be revisited. On the other hand, a bearish commodity price climate may also make it easier for FEB to make strategic acquisitions as asset prices decline.

Key Facts: First energy bank

Paid-up capital at launch $1bn
Estimated profit for first year of operation $107m
Total investment in Menadrill $3bn
Source: First Energy Bank

The creation of MENAdrill

First Energy Bank’s [FEB] first major investment is a sign of the bank’s ambitions, with the formation in July 2008 of Menadrill, a Middle East-focused offshore drilling and services company.

Launched in collaboration with strategic partner Gulf Finance House (GFH), based in Bahrain, and technical partners the US’ PFC Energy and the UK’s Noble Denton, the company aims to set a new benchmark by penetrating what is a difficult industry, but one that also promises to deliver high margins and healthy returns to investors.

The $3bn project aims to have up to 20 rigs operational within five years. This expansion is to be achieved largely through acquisitions, with the company believed to be in the process of acquiring a drilling company with several rigs active in the region, and others under construction.

Menadrill’s diversified drilling portfolio will include jack-up and semi-submersible rigs capable of drilling in shallow, medium and deep water, and land rigs. It will also provide project management services.

However, the intention is not to compete directly with the established companies that offer services across the whole offshore sector – for example, the US’ Halliburton and Baker Hughes – but to focus on the shallow-water sector.

The company estimates that over 90 per cent of the offshore wells drilled in the Middle East and North Africa region in 2007 were in water depths of 100 metres or less.

It can call on cutting-edge expertise provided by Noble Denton, which specialises in offshore activities, including specialist marine operations such as rig moving.

Menadrill has moved quickly into the market, signing a $400m contract in September for two drilling rigs to be constructed at the Maritime Industrial Services yard in Sharjah.

“Slots for new rig construction are very rare,” says Esam Janahi, chairman of FEB. “So when we saw that these contracts fitted our fast-track plan for Menadrill and offered good value for money, we moved aggressively to capture them.”

These rigs will be similar to the Texan Friede & Goldman Super M2 designs, and will be capable of operating in water depths of about 100 metres.

The rigs are been designed to meet the needs of the Mena drilling markets and crews of up to 110 people.

But with limited yard capacity available in the region, Menadrill is likely to concentrate on acquisitions to boost its fleet. It is preparing for its first rig to be delivered in September 2010, with another in late 2010.

Menadrill’s immediate aim is to have at least 10 rigs operational before reaching its target total of 20, focusing on the Mena and western India regions, within five years.

The company will face growing competition, however. Over recent months, new entrants have entered the region’s oil field services sector, with the UK’s Petrofac teaming up with an affiliate of Abu Dhabi’s Mubadala Development Company to form a UAE-based operation.

It will focus on engineering, design, procurement and construction services for onshore oil and gas schemes. Mubadala aims to compete with Schlumberger, Halliburton and Baker Hughes in the market for medium-sized jobs.

However, Menadrill says the Mena region’s offshore sector is still untapped. Raoul Le-Blanc, senior director of PFC, says that in the booming oil market, large, semi-submersible rigs could command a daily rental rate of $500,000, while 300-foot jack-up rigs cost $180,000 a day.

Drawing on the expertise of its prime investor, FEB, Menadrill’s extensive contacts book will help to secure orders, but it may have its work cut out to win market share in this competitive sector.