Abu Dhabi National Energy Company is pursuing an aggressive expansion strategy across the sector.
Founded in 2005, Abu Dhabi National Energy Company (Taqa) already has a range of interests, from power generation and water desalination to oil and gas production and gas storage. Chief executive officer (CEO) Peter Barker-Homek, a former mergers and acquisitions (M&A) adviser at UK energy giant BP, was appointed in May 2006 to expand the business by targeting international investment opportunities across the energy sector. Taqa is now a global energy business with AED8.6bn ($2.3bn) in revenues for the first six months of 2008.
The company is 75.1 per cent owned by the government of Abu Dhabi via state-owned Abu Dhabi Water & Electricity Authority (Adwea), which controls 51 per cent of Taqa’s stock, and the state-owned Farmers Fund, which controls 24.1 per cent. Private UAE shareholders hold the remaining 24.9 per cent.
Taqa is an investment vehicle for the Abu Dhabi state, but compared with the emirate’s other energy investment companies, such as International Petroleum Investment Company (Ipic), it acts more like an operating company. Its board represents some of the best-connected Abu Dhabi business leaders. Chairman Hamad al-Hurr al-Suwaidi is also director of local investment firm Mubadala Development Company and executive director of the Abu Dhabi Investment Authority (Adia).
Taqa is divided into upstream exploration and production, midstream activities - mainly gas storage in Europe - and downstream, comprising power generation and desalination. The company runs six independent water and power plants in the UAE and handles 90 per cent of Abu Dhabi’s water and electricity through an 11,000MW power generation base and 591 million gallons a day of desalination capacity.
Overseas, it operates through geographically distinct affiliates. In Saudi Arabia, its 250MW Jubail co-generation plant is operated by Jubail Energy Company, a joint venture of Taqa Generation and the local National Power. In Canada, it operates as Taqa North. In the power generation field, Taqa’s 90 per cent interest in the Takoradi International Company is held by Taqa Generation, its subsidiary in Ghana.
Upstream, Taqa operates four fields off the western coast of The Netherlands and has a growing presence in the North Sea, having acquired six fields in July 2008. It also has production of 36,000 barrels of oil equivalent a day in North America from 2.5 million acres, 1.8 million of which are yet to be developed.
Midstream, Taqa has three gas storage facilities, in The Netherlands and Canada. The Dutch Peak Gas Installation has production capacity of 36 million cubic metres a day (cm/d), delivering gas to the national grid. The 3.2 billion-cm/d capacity Bergermeer Gas Storage Project, also in The Netherlands, will be Europe’s largest gas storage facility when it comes on stream in 2013.
The main platform for Taqa’s international expansion is downstream, and the company’s power-generation activities have spread beyond Abu Dhabi into four other countries: Ghana, India, Morocco and Saudi Arabia.
Under Barker-Homek, Taqa has embarked on a highly aggressive expansion programme, targeting investment opportunities across the energy sector. The company is expected to end 2008 with assets of $30bn and is looking to double this within four years.
The Abu Dhabi government views Taqa as one of its main instruments for extending its investment portfolio in the energy sector, alongside groups such as Mubadala and Ipic.
Taqa needs to raise further debt to continue its asset purchases, capital-ising on the emirate’s A-grade sovereign ratings. In June 2008, it received board approval to sell AED4.15bn worth of bonds convertible to shares.
This year, it has announced plans to buy a 2,000MW power plant in North America for $2bn. It will also invest in assets it has already acquired. About $3bn will be spent on expanding the production of new North Sea fields from 40,000 barrels a day (b/d) to 60,000 b/d.
Taqa is also planning a $5bn joint venture with Saudi Arabia’s Al-Zamil Group to build captive power plants in the kingdom’s economic cities. In India, it is looking to team up with fellow Abu Dhabi group Oasis Inter-national Power in the power generation field. After 2012, the company plans to pursue an organic growth model using its existing land bank.
Taqa’s elevation to the ranks of globally active energy players underlines the neat fit of its business model: it is an energy company with a medium-sized capitalisation but the financial strength of a major. This unique combination has given Taqa the confidence to raise huge amounts of debt to buy assets.
Taqa’s unique selling point is that it is transforming itself into an operating company, in conjunction with fulfilling the emirate’s desire to deploy its wealth through investments in key strategic energy assets.
Taqa appears comfortable with the state’s involvement in decision-making. The board puts forward decisions that are commercially based, designed to grow its three main business areas and produce the best value for shareholders, says Barker-Homek
However, there are risks involved in Taqa’s high-spending strategy. The company acknowledges that it is operating in a difficult credit market and that there is a risk a decline in commodity prices could leave it burdened with expensive assets that are unlikely to deliver effectively to the bottom line.
In 2007, Taqa enjoyed a 113 per cent rise in net profits to AED1bn. The company’s 25 per cent annual growth target could be attained through assets developing organically, as high revenues drive growth.
Q&A Peter Barker-Homek, CEO
Taqa’s stated aim is to become a $60bn asset company. Why fix on this number?
We could have gone out with a more modest number, but the rationale behind $60bn is my belief that a company only achieves scale in a market if it reaches a certain size.
If we look to the UAE, we have already got $9bn in assets and that is forecast to grow to $16bn without me doing anything - that is just power and water demand. So if I do anything in that region at all I am going to get up to $20bn pretty easily.
In Europe, we have the same dilemma. But I also believe that you can get too big and then become unwieldy.
To reach that sort of scale, the firm has to grow by 25 per cent a year. Is that realistic?
We have to raise debt or equity to fund our growth, plus whatever cash we are producing from ongoing operations.
Growing at a 25 per cent rate is probably not going to happen from internal cash flow - you would have to tap the debt or equity markets. So if either or both of those were to seize up, it would be a problem
I would say it is challenging, even for somebody with our credit rating right now to raise capital at good prices. That could dampen our growth.
What role does organic growth play in the Taqa business model?
As we approach 2012, we will have a footprint that in itself will have a rich enough opportunity set that we will be less driven to do acquisitions.
We will become more of an opportunity shopper. That is already happening. Canada is a great example of where I would like us to get to across our business segments. We do not need to do another acquisition in Canada to replace reserves and maintain production for the next five years, and that has everything to do with achieving scale in the land bank we acquired.
Is there not a danger that you will pay over the odds for assets in the current price climate?
Some of our asset values are very dependent on the commodity cycle. But I was asked this same question last year when oil prices were at $80, and now look where we are. If we look at the fundamentals, the Bric [Brazil, Russia, India, & China] economies are growing in energy intensity. Bolt that on to what is happening in the region with real inward investment, real industrialisation.
If you take all of that together and ask me do I think we will be consuming more or less oil in 2020, the answer is that we will be consuming more of all energies, whether renewables, nuclear, gas or oil.
How are high prices impacting valuations?
I think valuations are high today and the market will vacillate. I also think that Taqa has built itself to the point where it does not just have to do deals based on valuations.
We do deals because of our reputation, how we work with unions, how we want assets and people long term, and how we have been accepted by regulators. Being a counterparty to a transaction with us is taking on greater value than merely the price.
What drove your decision to grow your presence in the North Sea?
If you look at the development and the management and personnel costs from a major’s perspective, they can manage them on a 1-billion-barrel reserve, but when it comes to a 100-500-million-barrel reserve, which is what is now populating the North Sea, it better suits Taqa. Taqa is the size of a mid-cap when it comes to E&P [exploration and production], but has the credit strength of a major.
Is Taqa’s ambition to be an international major?
Certainly by brand recognition, corporate social responsibility and global scope, I would like us to become a known name in the industry. But we will not integrate in the way the majors did. We are focusing pretty much on three distinct segments: upstream, power generation and the midstream business. There is some synergy there but each in its own right also represents sound business and offers some counter-cyclicality. This is why we have chosen them.
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