Federal's Russian gamble
FOR most people, the harsh climate of Sakhalin to the north of Japan does not make it the most hospitable place in the world to do business - more so given the fraud and tax evasion scandal plaguing Yukos, Russia's national oil giant. But for Federal International, a home-grown supplier of high pressure flowline control products to the international energy industry, taking a gamble on the oil-rich Russian tundra could pay off handsomely.
Federal, which is also involved in turnkey engineering, procurement and construction (EPC) jobs, recently took a 12.5 per cent stake in a venture called Singa Consolidated Engineers & Constructors (Singa) with four other local firms to pursue opportunities in the oil-rich regions of Sakhalin and the Middle East.
If things turn out as planned, investors who had bought the stock when it was first offered at 30 cents a piece in September 2000, and has since rallied to over 60 cents, will be in for even brighter times.
'Who knows? Even $1.50 a share may be possible in the long run,' quipped Federal's chief executive chairman Koh Kian Kiong, who was bubbling with excitement about the company's prospects, notably in Russia where the 'big jobs' are.
In an interview with BT, Mr Koh explained that it was precisely this optimism for future big jobs in Russia that prompted two directors and himself to part with a total of 35 million shares at 62 cents each to financial institutions, including Commerzbank.
'We can then tap these financial institutions for our future growth,' Mr Koh said.
Singa will be the vehicle to make forays into Russia and the Middle East. Mr Koh said the idea of forming a conglomerate, rather than venturing solo, was prompted by its long-time customer, Japan's Chiyoda-Toyo Engineering.
'The Japanese contractor won a Russian project and has been our customer for the past 30 years. They persuaded us to form a consortium.'
'It is easier to go in as five chopsticks rather than a single one, which can break easily. As a consortium, we will get a bigger say as one of the major contractors rather than a sub-, sub-contractor of Chiyoda,' he added.
Chiyoda and Toyo are part of a four-member Japanese-Russian consortium which had been awarded the US$1 billion contract to build Russia's first Liquefied Natural Gas (LNG) plant and crude oil export facilities for the Sakhalin-II project.
Sakhalin-II project is an extension of the massive Sakhalin-I project. With its potential recoverable resources of about 2.3 billion barrels of oil and 17 trillion cubic feet of gas, several phases of development are being planned. Capital investment could reach US$12 billion, making Sakhalin-1 the largest foreign direct investment in Russia.
Given the long-term nature of such projects, it makes sense that Federal is eager to have a foothold. Once it has established a foothold, the company whose international clientele includes oil majors, drilling contractors, shipyards and refineries, can tap other jobs.
BT understands that Singa is preparing to bid for a US$200 million infrastructure project within the Sakhalin-II project. And the benefits to Federal, which will be involved in procurement if this EPC project is clinched, will be quite significant.
'From there, we may set up another company to tap other contractors,' Mr Koh said.
But Mr Koh knows better than to put all his eggs in one basket. Besides Russia, growth is sought in other oil-rich countries like Indonesia, Malaysia, Middle-East and China.
Despite this, several analysts have criticised Federal for being too dependent on Indonesia, where its main customer has been PT Gunanusa.
PT Gunanusa is 77 per cent owned by Iman Taufik, whose family has a 2.4 per cent stake in Federal.
'In every country, there is a risk. Indonesia has its problems. But people still make money. If not, why are Total, Exxon, BP and all the oil giants investing millions of money in the country? Even our government is putting money there. People who can't get the fruit always say the fruit is sour!' Mr Koh countered.
Gunanusa has signed a memorandum of understanding with Singapore's Keppel Fels to tender for Unocal's US$150 million to US$200 million offshore production platform job. Federal is involved in the supply side of this project.
All in all, if strategic investments made over the past year to penetrate new markets go as planned, Federal could be looking at a 'significant' boost to its order book for next year.
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