After taking big loss on assets, Taqa sets recovery course

What next for Taqa after it writes off Dh22bn and Adwea fills a big hole in its balance sheet?

A Taqa gasfield in Alberta, where 60 per cent of its hydrocarbons output comes from. Courtesy Taqa

Abu Dhabi National Energy Company’s top management is putting together a recovery plan after taking the long-delayed decision last month to write off an enormous Dh22 billion (US$6bn) of value in its oil and gas portfolio.

The Abu Dhabi Water & Electricity Authority (Adwea), the majority shareholder in Taqa, as the company is known, filled the hole left in Taqa’s balance sheet by transferring land valued at Dh18.7bn from Adwea’s power and water plant sites, swallowing the entire loss of equity value itself, according to Taqa’s annual results.

Having spent $25bn building up an international portfolio of oil, gas and power assets under previous management before oil and gas prices crashed, last year’s writedown leaves that portfolio with a book value of about $9.5bn.

Most of the value of Taqa is now in its domestic utility assets and the property leases – about 60 per cent of assets. The clean-up process gives Taqa a fresh start after several years of severe contraction.

Adwea also quietly announced to the Abu Dhabi Securities Exchange (ADX) this month that it had taken over a stake of nearly 22 per cent from the government’s fund supporting farmers in Abu Dhabi, bringing Adwea’s total ownership to 74 per cent.

The farmers’ fund had owned the shares since Taqa’s inception in 2005, using the stake as a source of steady income for agriculture investments. But after four years without a dividend payment the decision was taken to transfer that stake.

This week, Taqa will receive nominations and elect its board, which may lead to some fresh faces being brought in and possibly even the appointment of a new chief executive.

The company has not had a chief executive since Carl Sheldon left in 2014 and has been run by a succession of chief operating officers while it has undergone a deep contraction, including the loss of about 1,000 jobs and a 70 per cent reduction in capital expenditure (capex).

The question, then, is what course will the company set for its future?

Taqa faces big challenges, including a low oil price and a high debt load, which was above ­Dh70bn at the end of last year.

Taqa’s management has been urged by some of its lenders and advisers to concentrate its portfolio on its utility business, where it is the near monopoly provider of electricity and water in Abu Dhabi as well as owner of profitable power utilities in Morocco, Ghana and elsewhere, and to sell off the oil and gas assets in whole or in part.

But Taqa’s management is confident that the company has some room to breathe financially and will not be under pressure to hold a fire sale.

“We are comfortable with our oil and gas portfolio and are not planning to sell these assets,” says Saeed Al Dhaheri, who took over as acting chief operating officer in summer last year. “The transformation has resulted in our operational oil and gas assets being cash flow positive.”

Taqa’s free cash flow last year was up by 25 per cent at Dh7.3bn as operating expenses were pared by another Dh2bn and capex was cut to the bone, down to Dh1.1bn from Dh6.4bn two years before and as high as Dh13bn in 2012. But as Taqa’s previous chief operating officer, Edward LaFehr, warned last year, the cuts are unsustainable, with oil and gas production having declined by 18 per cent in the past three years.

“There may not be much scope for Taqa to make further cost and investment reductions without it adversely affecting revenue and cash flow generation,” says Julien Haddad, a debt analyst at Moody’s Investor Service in Dubai, in his latest report.

Indeed, Taqa is planning to increase capex this year to Dh1.8bn, which is a level consultants have said is needed to maintain production, which was 137,000 barrels of oil equivalent last year, down 5 per cent from the year before.

The company has a good headwind from oil prices, which are about 20 per cent higher on average, so far, this year than last year. “The 2017 capex will be completely self-funded by cash generated by the business [and] is sustainable for us at prices lower than today’s levels,” said a Taqa finance official.

Although Mr Al Dhaheri said Taqa is committed to “core” assets, it is open to offers at the right price. The only asset explicitly identified as core, apart from the domestic and African power projects, is central Alberta, where the company is committed to investing.

About 60 per cent of Taqa’s hydrocarbons output – mostly gas – comes from Alberta and central Alberta makes up about one quarter of total acreage, but has 75 per cent of the productive land.

Taqa has already sold off parcels of its Canadian property outside this area and that is likely to continue.

Elsewhere in North America, Taqa withdrew from the sale of its half-share in Lakefield wind farm in Minnesota because of market conditions. It says that is performing well now but still classifies it as “non-core”.

In Europe, Taqa operates several offshore UK oilfields, as well as the key Brent pipeline. The offshore fields are not only expensive to run but carry a big decommissioning liability – in other words their owners have to provide for pulling out and disposing of all that equipment from the North Sea, making them a tough sell to a buyer, especially as the liability now exceeds the asset value.

Another asset for sale could be the long-delayed Atrush field in the Kurdish region of Iraq, which is supposed to produce its first oil this year, ramping up to 30,000 bpd. Taqa bought into Atrush as operator four years ago when the find was first declared commercial, paying $600 million for an initial stake of just over 53 per cent. After the Kurdish Regional Government (KRG) exercised its option to take a 25 per cent stake, Taqa’s holding is now 39.9 per cent. Taqa’s 12,000 bpd share would boost production by about 9 per cent this year even after the writedown of a third of its value last year.

Atrush is valued on Taqa’s books at about $629m.

With the prospects brightening some, Taqa’s management has ruled out delisting the company from ADX, where its shares have recovered from their lows but are still worth only about one-third of their highs.

A sustained rise in the oil price would be needed to really put the wind in Taqa’s sails.

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