Nothing significant is going to happen in the whole region until the beginning of Q3 2017.

Mishal HAMED KANOO Chairman KANOO GROUP

Family owned

May 9, 2017

TOGY talks to Mishal Hamed Kanoo, chairman of Kanoo Group, about how the company is weathering the current industry cycle, the intention to transform the company from a family business into a more professionally structured one, the latest trends in the oil and gas industry, the challenges and opportunities that companies in the industry face and the company’s strategy for 2017.

Kanoo Group, founded in 1890, operates an array of business activities throughout the Middle East in areas such as shipping, engineering, chemical products, oil and gas, and many others. Present in the UAE since the 1960s, the group employs more than 4,000 people globally and has offices in Oman, the UK, France and India.

• On the low-price environment: “This is an opportunity for state-owned oil and gas companies to readjust their books as far as the pricing that they contracted the suppliers for is concerned.”

• On cost cutting: “It is very easy to get rid of people when things are negative because businesses can use the argument that, since they are not making money, they need to cut down on costs.”

Besides touching on these topics, Kanoo also discussed business strategies in the new energy environment and the factors shaping energy demand. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Mishal Hamed Kanoo below.

How is your business responding to the new oil and gas environment?
One of the benefits of a family business is that you can have a long-term view rather than a short-term approach. Kanoo is not a publicly listed company, which means I don’t have outside shareholders that I have to worry about performing for every year. We can therefore look and see what trends there are in the economy or in a sector within the economy and take a long-term view.
We all know the industry is cyclical. Many factors determine when the cycle starts, when it ends and how long it lasts, but cycles are usually of a five- to seven-year duration. If something goes up extraordinarily, it will also come back down. Unfortunately, though, the pendulum never swings in a balanced way. It is either extremely high or extremely low until it reaches the medium and the pendulum starts to swing again.
The right approach will be to ask ourselves whether the price of USD 115 per barrel was too high or the price of USD 35 per barrel was too low and to figure out where the medium is. If I do my investments based on a price that is too high or too low, I’m going to miss the boat in either case.
In the long term, this is an opportunity for state-owned oil and gas companies to readjust their books as far as the pricing that they contracted the suppliers for is concerned. The fact that we are servicing both the suppliers to the oil and gas companies and the oil and gas companies directly means that we are obviously going to be affected.
Again, though, I am not going to make it sound like a catastrophe because, if you look at the price from March or April 2016 when it was USD 27 per barrel to the end of 2016, it went up 100%. Nobody outside the oil and gas business is registering this, though. It is like it never happened because USD 50 is still far short of USD 115. The question is whether or not USD 50 per barrel is a fair price. That is something the market will determine.

 

Which is the break-even price in the region?
The pricing is different for each country. When you see some budgets are at USD 50, some at USD 27 and some at USD 100, you have to determine if this is a real price or just the price they need to cover their expenses. The average cost of extraction in the region is between USD 2-10. Even if that is doubled to USD 4-20, that is what it costs not only for the extraction but also for transportation, storage and marketing. That would be a real cost.
Everything above that is the margin the government of the country decides. Maybe they have other overheads and expenses to pay, but that is not the price of oil because there may be a difference between what the country put in its budget and what the price per barrel actually is. Moreover, this difference may not be small.
The question each country must ask itself is if it can afford to have oil at USD 10 per barrel. For Libya, that may not be affordable since it needs to create an entire infrastructure. On the other hand, for the UAE, it is something that is affordable. If I do not want to do any more expansion or changes and I want to stay still for the next two to three years, that is my own choice.

What are some of the new business trends in the oil and gas industry?
The obvious trend is that of cost cutting, which you will continue to see for a while. Even though the price of oil has recovered 100%, you will still find people utilising this trend because it is a fantastic way to trim the fat.
It is very hard to get rid of people who make up the significant expense of your business and it is also very hard to get rid of people when things are booming. The thinking is: if you are making money, then why shouldn’t people stay on?
On the other hand, it is very easy to get rid of people when things are negative because businesses can use the argument that, since they are not making money, they need to cut down on costs. Whether this is true or not, it is completely up to the company, economy or government to utilise this principle.

What factors do you see shaping energy demand in the future?
I just came back from China where I visited Shenzhen and Shanghai. Shenzhen is an industrial base and there is not much there other than business and manufacturing. Shanghai is as international a city as they come. It has a population of 25 million and, if you put this in perspective, a population of 25 million is equivalent to the whole of the Gulf, a third of Germany and nearly half of France. Those people want to buy goods, new cars, plastic and other things.
During the economic changes of the past 15-20 years, China has only been inwardly focused, not outwardly focused, and therefore has not cared about the rest of the world. China goes and finds the natural resources that it needs to build its house and does not yet care for the outside. Once they do look outside, the question of sufficient resources to fuel this growth arises.
Even with alternative energies kicking in, there still isn’t enough for a country such as China. Moreover, the Russians and Indians have not properly begun to exploit their potentials. If you look at India, there isn’t enough electricity within the whole subcontinent to supply them. Imagine how much energy will be required by countries such as China and India. I doubt alternative energies will be sufficient to cover them.

How do you remain competitive and add value?

We are supplying other companies who either own the business or are supplying to the oil and gas industry themselves. Examples include Schlumberger, McDermott and so forth. They in turn supply to Total, Elf, Exxon, ADNOC, GASCO, etc. I know I am at the tail end and that I am not taking the risks they are. Though it affects me, my bell curve is not going to be painful at either extreme and I will neither enjoy the benefits when things go up nor suffer much when things come down.

What economic opportunities and challenges are oil and gas companies facing today?

In some cases, these companies are taking advantage [of the downturn] to remove most of the fat they have been building up. As I said, when you are making a lot of money, it is easy to hire people, easy not to consider how much they cost and easy to accept what the contractor tells you about pricing.
If I was a contractor to these companies and my profit margin was 50%, those companies are now coming back and saying they won’t accept 50%. They want me to come down to 10%. That is a 40% absorption for the services companies to swallow for the oil and gas companies.
The issue is that they did not need to have that at the beginning. It is like a swell that will come back to a normal price. As the pendulum goes too high it also drops too low and there has to be a sweet spot where everyone is satisfied.

Could you give us an overview of the company and its presence in the region?
We started off with the shipping business, as that was what the whole region was in. We graduated into travel and, as the boom happened, we moved into machinery, power, and oil and gas. All those came during the 1970s because of all the changes that happened in the region.
We have decided to take a different view compared to other companies, by which I mean we picked and chose the companies we worked with and created joint ventures. The oldest one started in 1935 with a company in the shipping sector. A joint venture of significance for us would last for 20-25 years.
To increase our presence, we look for long-term contracts and interact with professional and international companies where the idea of operating is about understanding what the requirements of the region are and what the problems within the economy are.

What measures have you applied in the company to modernise it since 2015?

We are currently transforming the company from a family business into a more professional structure and are setting up our group to have a professional CEO and CFO. The idea is to try and gradually remove the family from the business to allow the company to take the next step it needs to take. There was much resistance and people worried about the positions and the social status they would lose. Any change comes with a cost and you end up becoming an unpopular person within the family.

What is your business strategy for 2017?
Nothing significant is going to happen in the whole region until the beginning of Q3 2017. The reason for this is that there is a summer malaise that happens throughout the world where people become quite slow and it takes a while for them to get back on track after the summer vacations. You literally have 1.5 months before, during and after the summer vacations during which time nothing really happens.
Most of the economies in the world that were a disaster before, such as that of Brazil, are picking up. All these economies are improving and the only one that is not going to change, not because of the economic factors but because of political factors, is that of Russia.
To draw an analogy, when you used to turn a TV on, it would take the TV a few milliseconds to heat up before the screen would pop up. We are in a position where it is heating up and ready to open but, because we do not see it open, we think it is not.
This will be a good time to look at Dubai to buy companies or, depending on the type of business, to add to your portfolio again or determine if you can’t afford to do so. Starting from Q4 2017 and going into 2018 and 2019, things should start looking up. You have to take a risk because even though the signs are positive, anything could happen and it might not happen in 2017. As is said: fortune favours the brave.

For more information on Kanoo Group in Abu Dhabi, including the company’s recent work engineering and fabricating stainless steel tanks and skids, see our business intelligence platform, TOGYiN.
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