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Topaz Charts Profitable Course in Risky Waters

DUBAI — Energy exploration and shipping are among the world’s riskiest industries. Topaz Energy and Marine, headquartered in Dubai, works in both.

Topaz builds, repairs and operates vessels used to supply offshore oil and gas facilities. On its face, this might seem the sort of business that inflicts ulcers on its executives and nightmares on its bankers. The oil industry, for example, can be a casino driven by unpredictable swings in the price of crude, while shipping, notorious for its booms and busts, is caught in its worst downturn since World War II.

The risks don’t end there. Topaz must also contend with physical dangers such as pirates on the high seas and leaks of deadly hydrogen sulfide gas from undersea oil fields.

Yet, Topaz has found a profitable niche in this tempestuous business, one in which it avoids the worst extremes of both the energy and shipping industries while managing to expand its business and compete at a global level.

“You know, they say a ship is safest in harbour, but that’s not what ships are designed for,” says Topaz Chief Executive Officer Fazel Fazelbhoy.

His company has a fleet of 82 ships and boats, with an additional 15 on order, and it operates in many of the world’s big oil patches, from the North Sea to Indonesia. One key to its success has been its role as a major fleet operator in the Caspian Sea, including at one of the world’s super-jumbo oil fields — an “elephant” called Kashagan. Its ship-repair business, meanwhile, is the biggest in the Middle East after government-owned Dubai Drydocks.

Topaz has earned a profit in each year since its formation in 1998, with its annual net income growing at an average rate of 60 per cent. For the first half of this year, it posted an 8 per cent rise in revenues and an 11.6 per cent increase in net income, in spite of the worsening recession. In November it plans to complete construction of a high-tech shipyard in Kazakhstan.

And while some of its rivals might be hunkering down in a time of uncertainty, Topaz is prowling for acquisitions.

“We don’t want to waste a good recession,” Fazelbhoy told Khaleej Times recently in an interview at his office. “In a time when asset prices are low, when company prices are low, when stock prices are depressed,… we want to use our strength to make a strategic acquisition in the right geographies.”

Fazelbhoy maintains that Topaz’s business is less risky than it might appear. For starters, only 3 per cent of its fleet services oil rigs involved in exploration for crude – a segment of the petroleum industry that is particularly vulnerable to changes in oil prices. The remaining 97 per cent of Topaz’s vessels work for companies that are developing existing oil and gas fields or already producing at them. These are two much less volatile parts of the upstream energy business.

Also, Topaz’s boats have an average age of 9.6 years, in an industry glutted with older vessels. Oil majors such as Britain’s BP and Italy’s Agip — both of which are Topaz clients — tend to distrust older boats and are willing to pay a premium for newer ones, 
Fazelbhoy said.

As for its ship-building business, Topaz produces smaller, more specialized vessels than the massive tankers and container ships that Hyundai Heavy Industries and other ship fabricators can take three years to produce. Topaz’s production cycle is about half that long, so it can respond more quickly to changes in supply or demand and therefore avoid the boom-bust cycle that has plagued many shipbuilders for decades, he said.

Topaz, with 6,000 employees, generated sales last year of $419 million and net income of $47 million. The company’s profit and revenues so far this year are “well ahead” of where they were for same period of 2008, and its spending plans are intact, even with the recession. “We’ve actually increased the (charter) rates on some of our vessels,” Fazelbhoy said. While some of its boats operate in the Middle East, notably in Qatar, three-fourths of its fleet is based in Azerbaijan and Kazakhstan, in the Caspian. Topaz landed a new $100 million deal in May to supply six ice-resistant barges to Agip at the Kashagan field. Its newest shipyard, equipped with a monstrous 600 tonne-capacity boat lift, is taking shape near the Caspian town of Bautino, Kazakhstan. Fazelbhoy, 52, takes a personal interest in this repair base; he sees it as creating a maritime history where none has existed. “Every time I go there and see it grow, it’s just like being a father all over again,” said the executive, who has two daughters of his own.

In between inspection visits to Bautino, he monitors construction at the site, 4,000 kilometers from Dubai, with a web cam on his office computer.

Kashagan, in the northern Caspian, is renowned for its difficult working conditions. The water there is less than three meters deep in places and can freeze over completely in winter. The elephant field also contains lethal hydrogen sulfide; Topaz once won a safety award from BP for evacuating 211 crewmen from an Azerbaijani rig during a gas leak.

Getting new boats to the Caspian from its shipyards in Abu Dhabi and Fujairah can be a project in itself. Topaz had to partly disassemble one vessel to fit it through Russian canals and under bridges, then reassemble it upon arrival at the inland sea. In June, faced with the risk of ocean pirates in the Gulf of Aden, Topaz sought protection from a British naval convoy for a tugboat pulling two of its barges to the Caspian. “It’s a difficult market to operate in. It’s not for either the faint or the weak-hearted or someone who’s got one or two vessels. You need to have enough critical mass to sustain a profitable organisation.”

Topaz has 61 boats in the Caspian and a 40 per cent share of the market at Kashagan. As well as having a global reach, Topaz is an innovator, building oil-field services boats with an unusual twin-hull design. Made of aluminum, these catamarans are lighter than single-hulled boats made from steel, so they burn less fuel and are cheaper to operate. Topaz hopes to sell some to the UAE Coast Guard as patrol vessels.

In April, Topaz restructured its businesses under two umbrellas: Topaz Engineering, for its Nico and Adyard shipyards and its repair units, and Topaz Marine, which owns and operates its offshore supply fleet.

The company’s shares are listed — indirectly, through its parent Renaissance Services — on the stock exchange in Muscat, Oman.

Now it’s scouting for takeover targets. Fazelbhoy concedes that the window of opportunity to find a deeply discounted company in narrowing, as the recession ebbs. Topaz has identified at least 12 acquisition candidates, so far.

“We’re looking for motivated sellers, who have a reason to get out,” he said. “We’re not looking for a distressed company because all you’re doing is buying stress.”

Fazelbhoy, born in Pakistan and educated at universities in the US, worked for years in the industrial instrumentation and controls business before joining Topaz.

He became chief executive in January of last year and describes himself as a hands-on manager whose biggest thrill is to create.

“I don’t think I’d be a very good banker, in terms of just watching somebody else do something with my money. I’d rather be the guy doing something with the money and creating value for 
the customer.

“No disrespect to the bankers — we need them desperately,” he said with a laugh. ” But I’d rather be on this side of the production fence.”

bruce@khaleejtimes.com