NANA profits shine with longtime diversification strategy
August 12, 2011
A strategic business plan adopted in the mid-1990s by NANA Regional Corp. for its business subsidiary, NANA Development Corp., has served the company well through the ups and downs of the economy, including the sharp national recession that began in 2009.
"Eighty percent of our business income was from oil and gas support services in 1995, which made us very vulnerable to the periodic swings in that industry," said Helvi Sandvik, president of NANA Development Corp.
"A lot of the work we were doing was also in the low end of the business in terms of margins. We felt we needed to change our strategy and diversify into other businesses with higher margins, and in other geographic markets," Sandvik said.
This turned out to be a wise decision.
"We would be in a world of hurt if we were still 80 percent dependent on Alaska oil support work today given the current state of the industry in Alaska," Sandvik said.
NANA is doing well, thanks to royalty earnings from the Red Dog lead and zinc mine, which is on lands owned by the corporation, as well as good performance by NDC-owned businesses. NANA earned a $41.17 million net profit on $1.59 billion in revenues in 2010 and paid about half of its earnings in dividends to its 12,700 Inupiat shareholders. Earnings in 2011 are expected to be similar.
NANA Development's strategic business diversification was done intelligently. The corporation built off the expertise it had developed in oil and mining support, in services like catering, facility management and security to branch out into related industries.
For example, an early diversification into hotels took advantage of NANA's experience in housekeeping and catering services gained from its North Slope support work. In the 1990s NANA built three hotels in Anchorage in a joint-venture with Sodexo, and in 2001, one in Fairbanks that includes a consortium of village corporations among the owners.
Engineering was another key diversification, and one that also promised higher margins. NANA made two acquisitions of two veteran Alaska civil engineering firms, DOWL Engineers, in 1999 and
Arctic Slope Consulting Group, from Arctic Slope Regional Corp., in 2005. DOWL became DOWL/HKM in 2008 when HKM, a Lower 48 company, was acquired. This allowed DOWL to expand into other states.
NANA Development further diversified into oilfield engineering, an industry where it felt at home, with joint ventures with Colt Engineering in 1997. This became NANA/Colt Engineering, owned 50-50 by both companies and eventually NANA WorleyParsons, when WorleyParsons, an international company, bought Colt Engineering's stake in the joint venture in 2007.
The company operates separately from WorleyParsons' worldwide operations and is legally a separate company, but uses WorleyParsons' resources and expertise. Parsons Engineering, now WorleyParsons, has an Alaska history that goes back to the design and engineering of the early North Slope production facilities in the 1970s.
Many of NANA Development's "legacy" North Slope oil subsidiaries, like NANA Oilfield Services, which sells fuel and lubricants, still operate. NANA Management Services and Purcell Security still provide catering, housekeeping and security for North Slope producing companies, which they have for more than three decades.
NANA Regional Corp. also continues to own a small working interest percentage, less than half of 1 percent, in the Endicott oil field on the North Slope. This came about when NANA participated with a number of other Alaska Native regional corporations in a consortium with BP in bidding for leases in a 1979 state lease sale. The group won the leases, a discovery was made, and an oilfield was developed.
Not all of NANA Development's early oil service initiatives were continued. NDC was once part of a joint venture owning and operating drill rigs with Veco Alaska and two North Slope village corporations, Kuukpik and Kaktovik Inupiat Corp. The rigs worked for several years but were sold when the major producing companies pushed for a consolidation in the Alaska drilling industry.
Moving to ships, film
NANA Development's experience in the Alaska oil patch has led it now to its latest acquisition, Louisiana-based Grand Isle Shipyard, a major provider of offshore platform maintenance services in the U.S. Gulf of Mexico. This deal not only grows NANA Development by about 10 percent, in terms of revenues and workforce, but it is more significant than that number indicates, Sandvik said.
Grand Isle has about $200 million in annual revenues, which when added to NANA's own revenues, will bring the parent corporation close to $1.8 billion per year, possibly more.
"The numbers of the Grand Isle deal underestimate the significance of this to us," Sandvik said. "This is a strategic acquisition that strengthens us in the oil and gas sector, and in the Lower 48. It will also provide new opportunities for our other companies that now provide support services to the petroleum industry."
For the current year, NANA Development is seeing a modest, and encouraging uptick in business for many of its subsidiary companies. NANA Management Services has long been diversified into serving institutions like hospitals, schools and university campuses, as well as its core business in support of petroleum companies. The company will see a modest gain in revenues and margins this year. Margins have been under pressure in recent years due to budget constraints among its customers.
NANA Management Services has a long history. The company was started as NANA Commercial Catering in 1974 to provide services to the North Slope oil producers. In 1986, the partnership changed to NANA-Marriott. Sodexho purchased Marriott's ownership interest and the partnership continues with NANA owning 51 percent of NMS and Sodexho 49 percent.
NANA Development's hotels in Anchorage and Fairbanks are doing better, Sandvik said, helped partly by the modest increase in tourism in 2011 after that industry dipped in 2010. NDC owns 100 percent of the University Lake Springhill Suites and 60 percent of the Courtyard Marriott near the Anchorage airport and the Springhill Suites and Residence Inn in midtown Anchorage, with Sodexho as the partner. All of the hotels are operated by NANA Management Services.
The Marriott-brand hotels are aimed more at business travelers and Alaskans than tourists, Sandvik said, but the lift that tourism is providing almost all hotel operators this year is helping NANA Development as well.
What's also encouraging is an increase of demand for engineering services this year; particularly engineering that supports oil and gas.
"This is a good indicator because engineering work means new projects will be moving into the pipeline for construction," Sandvik said.
One recent acquisition, however, did not fit NANA Development's overall strategy but was still done. It is an example of the benefits of remaining flexible enough to pursue new opportunities when they present themselves.
"We stepped outside out plan with an investment in Evergreen Films in 2010, which we felt represented an opportunity for us in a growing industry, film production. It is almost like a venture capital deal but it also complements our other businesses. All the services needed in making a movie, providing equipment, construction services, hotel, food services and security, are things that we do," Sandvik said. "It was a bit of a wild card that was not on the horizon for us earlier."
Evergreen Films is an Alaska-based independent film production company that has developed 3D production and post-production studios in both Anchorage and Los Angeles using advanced technologies. In recent project for Evergreen has been working with BBC Earth to develop a film on dinosaurs.
Like most other Alaska Native corporations, NANA Development has delved into government contracting work. The company began delivering services to the government by participating in the Small Business Administration's 8(a) program in 1996.
Over time, as it has developed expertise — many of the subsidiaries have graduated from the 8(a) program and are now competing without preferences, while some of the companies are still eligible for the program. Sandvik said the government services group continues to grow, and over time are transitioning beyond the 8(a).
"Last year, 56 percent of our government contract revenues were captured through the 8(a) program, whereas this year only 42 percent of our government contract revenues will be captured through the 8(a) program," Sandvik said.
Revenues from government contracting are growing fast, however. In 2010 these totaled about $600 million, Sandvik said, but are expected to reach $875 million in 2011.
"Also, 90 percent of the work we are contracting for in government services is competitively bid. Not only have many of our companies now graduated from the 8(a) program, but there is also competition within the 8(a) world, where one 8(a) company is competing against another," Sandvik said.
NANA Development will be less dependent on 8(a) but will still be in the business.
"The 8(a) world is changing, but it's not gone," Sandvik said. "What 8(a) means to us is access to markets, for us to learn how to deliver services. We want it to be a strong, growing part of our portfolio," but not dominant.
"Our strategic diversification is our strength and it has allowed us to ride out downward swings in the economy, like that in 2009," Sandvik said.
A few NANA Development companies were affected by the recession, including one focused on real estate, but in general NANA came through the recession unscathed. Growth resumed in 2010 and the trend has continued in 2011, Sandvik said.
"We have built a nice, diversified portfolio and we expect to see growth in each of our business areas," she said.
Another new initiative NANA Regional Corp. has under way is a pending agreement with NovaGold Resources to combine NANA-owned mineral holdings in Bornite, on the Kobuk River, with those owned by NovaGold in the Ambler mining district farther east. The properties that would be combined include the Arctic deposit, a volcanogenic massive sulfide deposit which contains copper, zinc, lead, and precious metals.
NovaGold has said that the Arctic VMS is one of the highest grade undeveloped deposits of its type in the world. The agreement, approved in concept by NANA's board last January, is expected to be signed soon.
For more information visit The Alaska Journal of Commerce.