Abu Dhabi National Energy Company – known as Taqa – reported a much smaller loss for last year by agreeing to sell some of its assets to an unnamed affiliate at an above-market price.
Taqa, which is due to release its first-quarter financial results next week, reported in early April that it made a loss of about Dh3 billion last year, mainly because of a writedown in the value of its oil and gas assets in North America, the UK and the Netherlands.
The largest component of that writedown – a “goodwill impairment,” in accounting terms – came from its troubled North American oil and gas assets, where an assessment by Taqa and its auditor, Ernst & Young, concluded that the value of the assets should be Dh1.8bn lower.
That accounted for most of the total of the Dh2.7bn goodwill impairment Taqa charged against the value of its assets last year.
In the fine print to its latest annual report, however, the company indicates that last year’s revaluation of its North American assets would have been much worse – US$1.8bn lower – if it didn’t have a deal in place in which “a related party” agreed to pay a price well above a “fair value” market assessment of those assets.
A Taqa spokesman said the company had no comment on the identity of the related party. Taqa also declined to comment on the valuation it put on its North American assets.
Under international accounting rules, companies like Taqa have two options when they perform the goodwill impairment test which is required each year. Typically, they use “fair value less cost of disposal” (FVLCD), which gives a market value to the assets-based calculations about what those assets are likely to earn or could be sold for.
Or it can use “value in use” (VIU), which allows it to assign a different valuation if there is a special arrangement in place.
A note in Taqa’s audited annual report says that for the North American assets “the VIU was calculated after considering an agreement with a related party whereby, at the request of Taqa, the related party agrees to offer to purchase certain oil and gas assets of the segment at an agreed price”.
It goes on to say that “the VIU of these oil and gas assets was calculated as 20,202 million dirhams pre-tax while the FVLCD of these assets was calculated as 13,587 million dirhams pre-tax”.
In other words, the deal in place for the “related party” to buy the assets values the assets 32 per cent (Dh6.6bn) above the “fair value” estimate.
Anthony O’Sullivan, the Ernst & Young partner who signed off on Taqa’s accounts, declined to comment.
Taqa – which celebrates its 10th anniversary this year – entered the North American upstream sector in 2007, initially buying Calgary-based Northrock Resources for $2bn. That proved to be inopportune timing as oil and gas supply there began to ramp up over the next several years, pushing natural gas prices down sharply and eventually contributing to last year’s oil price slump.
In 2009, the company began a series of writedowns in the value of those assets, including a Dh1.6bn charge in 2013 and last year’s Dh1.8bn writedown.
The company’s thinly traded shares have nearly halved since the beginning of last year and were at Dh0.76 yesterday. That decline is in line with much of the industry after the oil price crash, even though Taqa said it will not pay a dividend this year – its shares trade only thinly.
Abu Dhabi Water and Electricity Authority (Adwea) and other Abu Dhabi government entities, own 76 per cent of Taqa, with about 100,000 individual UAE-based shareholders owning the rest, according to Taqa.
Carl Sheldon, Taqa’s former chief executive, left last year and new management, led by the chief operating officer Edward LaFehr, has been trying to reduce the company’s heavy debt load and make operational improvements. That included record oil and gas production of nearly 160,000 barrels of oil equivalent per day, record power production and record earnings before interest, tax, depreciation and amortization, which was up nearly 8 per cent at Dh14.5bn.
But the asset value declines and debt service obligations have taken their toll. Although net debt declined last year by nearly Dh3bn to Dh73bn, the company’s equity base also shrank, which raised the company’s gearing ratio.
The company has also been reducing costs overall and has shrunk its capital expenditure budget for this year by $1bn, on top of last year’s 23 per cent cut. But staff costs overall rose last year and Taqa, in common with other oil companies having to make similar moves, has run into the blowback from labour unions and politicians in Britain after it announced job cuts there.
The company issued a statement about the UK job cuts, saying “regrettably it is necessary for us to scale back the number of people working with us. The impact of these changes will predominately be on contractors and consultants. We are currently proposing a reduction of around 100 onshore positions, but the process will take a number of weeks and involve consultation with our workforce. Our workforce are fully informed on the proposed changes and we will work to support and guide them through the process”.
The North Sea business, where Taqa operates the Brent pipeline system and is a shareholder in the Sullom Voe landing terminal for Brent, also took a hit to its asset value last year, but much less than the North American assets.
Taqa has the ability to keep financing and it carries a debt rating that is “investment grade” – A3 with Moody’s. But its financing cost last year was 20 per cent above its gross profit, which was higher than the previous year. Without the implied government backing, Taqa’s “baseline credit assessment” (what it would rate without that guarantee) would be two notches below investment grade at ba2, according to Moody’s.
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