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Thu 9 Jul 2009 04:00 AM

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On the up?

CEO Middle East talks to Fazel Fazelbhoy, CEO of oil and gas fabrication experts Topaz Energy and Marine, about weathering the storms caused by oil price fluctuations.

On the up?
On the up?
Nico International became involved in oil and gas fabrication work, says Fazelbhoy.

CEO Middle East talks to Fazel Fazelbhoy, CEO of oil and gas fabrication experts Topaz Energy and Marine, about weathering the storms caused by oil price fluctuations.

"We don't want to waste a good recession," Fazel Fazelbhoy, the boyish CEO of Topaz Energy and Marine tells CEO Middle East, laughing mischievously. "It's something our chairman has always said, so we are actively on the lookout for an acquisition opportunity. We've done two significant acquisitions over the last two or three years. And if we want to keep that growth rate and live up to our ambitions, it will only be through acquisitive growth."

What a wonderful position to be in. Prices are going through the floor, indeed Fazelbhoy says Topaz's stock value has been halved over the past twelve months, but for those with cash reserves, and access to more cash, a recession, or even depression, is a wonderful business opportunity.

We are looking to find a market that we believe in, and then to find an acquisition ... So it could well be in the Middle East.

But we're getting ahead of ourselves. Before we hear about Topaz's acquisition plans, perhaps a word or two on what the company actually does would be instructive. There's a clue in title. Topaz Energy and Marine is a company of two halves.

Fazelbhoy explains: "Topaz Energy and Marine is, as the name implies, very much involved with the energy and marine space. Primarily, we have two divisions. The engineering group combines two very strong brands that we have in the Middle East. One specialises in oil and gas fabrication, mainly offshore. Then we have a ship repair activity. Our business model is repair of rigs, but we are not as well known for that as we are for general marine repair.

"On the other side (of the engineering group), we have a ship repair company, Nico International, which as it grew became involved in some oil and gas fabrication work: we started building oil terminals, tank farms, storage facilities. Then we got into boat repair, mostly done offshore, and we got involved in boat building. So we decided to merge the two sides of the company and call it Topaz Engineering."

On the engineering side of the company, Fazelbhoy says there are approximately 5,000 employees. However, on the marine side, there are another 1,000. "The marine division has grown tremendously over the last three or four years. We now have 99 vessels, I am told, and that is only because one guy says he sold one yesterday. We operate primarily in the Middle East, and in the Caspian.

We operate mainly offshore supply vessels, which people can charter from us. These can be used for all sorts of specialised functions. For example, we build anchor handlers. We are building a third boat right now, but generally we buy them from specialised yards in Europe or Southeast Asia."

Share price undervalued

Topaz has not had a good twelve months, if you believe the stock market. It's touchy subject for Fazelbhoy, who says that the market may well be misleading. After listening to him talk about the subject, it is hard not to feel an element of sympathy. After all, fundamentals have not changed, only valuations of those fundamentals.

He says: "We were worth about $1.2bn in July last year. None of the fundamentals have changed. We have gone from strength to strength, but the current crisis has resulted in assets being devalued less than asset values in terms of companies. So stocks and general share prices have been hammered.

"Our share price is extremely undervalued, which is why I am privileged to be hosting a number of private equity firms who seem very interested in acquiring minority stakes."

Private equity firms, of course, won't step in if they think the market will soften further. So what is Fazelbhoy's reading of the market? The direction it has taken over the last year must have been very painful, but does he think the worst is now over?

He says: "It has been worse for the ego than anything else. It is difficult to understand how you keep beating your targets consistently, you grow, you are able to raise debt, you funded the Doha Marine acquisition - we raised $200m - we've raised almost $30m of debt financing this year, which is what we needed to do to fund our growth, and yet we are getting trashed in the market. The only good thing is you are in very good company. The very best amongst us are being trashed in the market. It is not a reflection of the company. It really is a reflection of sentiment.

"I would say it is bottoming out. I think we have seen the lowest point. I am a firm believer in the Nike swoosh - it pretty much fits my description of the market. There are all sorts of recoveries - V-shaped, L- shaped, U-shaped, but I believe in the swoosh, and we are on the way up." Operating in a volatile market

Certainly, the upward momentum of the oil price must be good for business. Anyone even remotely connected to the energy industry has a lot more cause for optimism now than they did only a few months ago, when analysts were confidently predicting that oil prices would hover around $35-$40 a barrel for ever more, and that the spike last July to $147 a barrel was something that would never occur again.

At the mention of the oil price, Fazelbhoy nods his head vigorously and breaks out into a broad smile.

"The oil price?" he says, "it is good. There was a time when some of the oil majors were really putting pressure on us to try to get us to reduce our rates on these long term contracts.

They would say: ‘look at the price, it has come down to $40, you guys have surely got to come down.' My response was that we could consider it but I didn't recall them giving us bonuses when oil was at $147. So how come it is now share pain, share gain? But now the price has gone up towards $70, the wind has kind of gone out of their sails."

But isn't it worrying to be operating in a market that has become so volatile over the last few years? At the start of the decade, Opec's pronouncements on oil prices were that $25 a barrel was the only price oil should ever be. That idea seems laughable now.

Fazelbhoy doesn't seem too worried: "We are protected from the worst of the fluctuations, because, and not by accident, only three percent of our vessels are involved in exploration. The majority of our fleet is either involved in field development or production. When oil prices drop, the first thing to get effected is exploration, because the oil isn't going anywhere. But we are not in that space, because we are on the long term development. We have 46 vessels on the Kashagan project, for example. We are not immune, but we are less affected by the ups and downs of the oil price."

Acquisition plans

If Topaz has this sort of secure niche within the market, no wonder the private equity firms are sniffing around. But does Topaz senior management really want external investment of that sort?

"There is a lot of interest from private equity around, which certainly gives us a lot of confidence, because they have done their analysis, not based just on our company, but on the niche we are in. If they want to invest, it gives us confidence. We have nothing specific on the table right now though, but we will engage in conversation, because private equity often brings with it opportunities."

And what about the acquisition plans that we discussed at the start of the interview? If Topaz really doesn't want to waste a perfectly good recession, then what are they looking to buy?

"We are looking at something that is within our core capability, or contiguous to it. We are looking at geographies, rather than looking at an individual company that has good prospects. We are looking to find a market that we believe in, and then to find an acquisition in that space.

So it could well be the Middle East, if there is an opportunity to consolidate, because we like what is happening here and we have faith in the long term. It could well be in the Caspian, although we are already the biggest operator there. We are looking at several companies. We are not in negotiation - we are in evaluation."

And what sort of price is Topaz willing to pay for the right opportunity? Fazelbhoy shrugs: "It could really be just about anything."

Fazelbhoy took over as CEO of Topaz in January last year, just before the economic world collapsed. He laughs at this, and points out that when he moved to the Middle East ten years ago, shipping rates promptly declined to levels comparable with today's. But still he grins like a man not unduly weighed down by the responsibility of heading a company in such a bleak economic landscape. "I hope it's not me," he says.

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