Stephen Thomas, the interim CEO of Topaz Energy and Marine, says he is “confident” that the $2.9 million fraud in a Topaz subsidiary unit discovered by parent company Renaissance “is the only fraud case” in the company, though he admits there are “other ethics violations” – which Thomas did not define – the company has now halted and continues to address.
The news was enough to reassure investors on the Muscat bourse that Renaissaince have stopped the rot at Topaz Engineering and Marine and made adequate provision for one off potential losses from operational and business impariments, with Renaissance shares rising 7.8% on the day.
Thomas was parachuted in from his CEO post at Renaissance after the sudden resignation of Fazel Fazelbhoy, which Thomas today confirmed was tendered at the request of Renaissance’s board. Speaking at a news conference, he made clear that the $2.9 million fraud reported to the Muscat Securities Exchange on 15 August was in relation to an “individual misappropriating funds” from a foreign subsidiary branch of Topaz, and that no other staff or executives who have been subsequently fired or who have resigned were directly involved.
Thomas revealed that the misappropriation was going on before Topaz purchased the foreign subsidiary, and it was not discovered in either initial due diligence over six years ago or the due diligence ahead of Topaz’s failed IPO bid in May this year. Instead, the fraud was discovered by an internal roll out of Renaissance’s business ethics and code of conduct to its subsidiaries.
Thomas also clarified that there is “no connection whatsoever” between Topaz’s announced $30 million provision for one-off losses in the bourse disclosure statement made on 15 August and $2.9 million fraud.
Instead, a notional $30 million estimate is being given to the market in respect of potential claims against the company from work carried out by the engineering side of the business and impairments to the firm’s Fujairah facility that may not be covered by insurance following a freak storm.
While Thomas says Topaz will mount a “very robust defense” to any claims, he intends to try to resolve any claim within the year to avoid open-ended litigation, failing which will try to gain an estimate of how long any dispute may continue.
Topaz Engineering
Thomas also spelled out the challenge for the engineering side of the business, the poor performance of which saw profits for Topaz as a whole drop by 77% in the first half of the year and shares in Renaissance drop to their lowest level since the nadir of the financial crisis in July 2009.
The engineering business – comprising marine and oil & gas work – suffers “serious issues” requiring a restructing, and currently has a below-par backlog of $70 million. Speaking in a news conference, Thomas said this business within Topaz “needs to get in a large contract in the course of this year.”
“There is a big effort underway to win more business for the non-shipbuilding part of the marine engineering business,” Thomas said. “There are opportunities for which Topaz is a serious contender,” he confirmed, saying that “as a minimum” Topaz engineering needs to book a $160 million backlog by the end of 2011, and ideally $240 million if the business is to be turned around in 2012. Failure to almost double the current backlog in the next six months will mean Renaissance will have to be “more patient” with the business, and review it if nothing changes longer term.
Thomas remains “very confident that the way we are building up the oil and gas part of the engineering business means it will be turned around in a short space of time,” and is “cautiously optimistic” that the business can bounce back as a “leaner and meaner” outfit by leveraging the natural advantage of its twin sites in Fujairah and Dubai while continuing its advances into up the value chain into the EPC market. The oil and gas EPC stream can “generate higher revenues from the space it occupies,” he said, adding that Topaz can also do more work client-side.
Topaz Marine
By contrast, Thomas was keen to emphasise the continuing strength of Topaz Marine, saying he expects “real upturn in demand” in the North Caspian. “There are rumours of significant new finds in the North Caspian from non-BP clients,” Thomas revealed, saying Topaz Marine has high prospects of being involved in field development and production there.
Topaz will now be divided more formally between the ailing engineering and robust marine businesses, ahead of a future floatation decision. Thomas said “one of the realities emerging from the IPO” was that shareholders will realize more value if the marine and engineering businesses are accounted for separately, and so it is “unlikely that we will progress with the IPO as originally intended.”
Thomas confirmed that Renaissance was considering a floatation of the Marine business as a standalone enterprise, and is in the process of more strictly dividing the two businesses within the company. ”Engineering will not be ready for listing in a year,” he said. “Marine can.”
Renaissance is in talks with banks to secure refinancing for existing short-term and long-term loans and to meet potential one-off expenses, its chief financial officer said in the call.
“We are funded to meet our current requirements,” CFO Vishal Goenka said in the call. He did not provide further details about the refinancing.
CEO
Following the departure of Fazel Fazelbhoy, who was at Topaz for 11 years until his shock departure in May, Thomas is in no rush to appoint a permanent replacement. “We need a CEO who will buy into the style and structure we have put in place, with specific industry expertise,” he said, confirming no search or deadline had been set by Renaissance.
Thomas attributed Fazelbhoy’s resignation – forced at the request of the Renaissance board – to escalating disagreement over the weaknesses and impairments in Topaz Engineering, the strategic direction of Topaz, the role of the CEO and a management style which Thomas and the Renaissance Chairman Samir J Fancy have described as “command and control.”
Fazelbhoy had taken on additional management in anticipation of floatation, which Thomas is now seeking to replace with a flatter company structure and stricter enforcement of the parent company’s business code of conduct.
