Deleum plans technology and regional M&A for future growth

This article was first published in The Edge Malaysia Weekly from 22 April 2024 to 28 April 2024.

Amid the current virtuous cycle in the oil and gas (O&G) industry, cash-rich Deleum Bhd is pursuing mergers and acquisitions (M&A), geographical expansion and early-stage company expansion to kickstart its future growth plans. We are embarking on multiple strategies, including investments.

The oilfield services company is expanding its footprint in Indonesia, offering power and mechanical (P&M) services to take advantage of the country’s rapidly growing downstream energy sector and state-run Pertamina’s refinery development master plan. P&M currently accounts for 70% of the group’s sales.

The company is also acquiring minority stakes in companies with technology related to the upstream O&G sector, opening the door to new product lines across the oilfield services sector.

“My vision for Deleum is to create a mini Halliburton, a Schlumberger or a Baker Hughes,” Group CEO Ramanrao Abdullah said in a new interview with The Edge. He mentioned giants in the oilfield services industry.

As known, Mr. Rao was appointed to his current role in July 2021 and is also a member of Deleum’s Board of Directors. He has his 20.36% deemed interest in the company. “We are looking to invest in early stage companies developing new technologies in the O&G industry with a view to commercializing the technology.

“Deleum is a good dividend company with decent profit margins, but there has been no new growth or technology introduction. Our shareholders need to understand that the company has a future and growth. ”

Exposure to technology

Towards this end, Deleum recently acquired minority stakes in two companies. He acquired his 7.7% stake in LatConnect60, one of which is a company that uses satellite imagery to track emissions, for RM4.72 million. Paradigm Technology Services BV offers digital slickline operations that allow you to do more work in one run, making your processes more efficient.

During Mr. Rao’s tenure, Deleum also acquired a minority stake in CRA-Tubulars. CRA-Tubulars is working to develop new titanium-lined composite tubing as a solution to upstream corrosion.

In his view, carbon sequestration, emissions control and energy efficiency are important areas to consider when tackling climate change. “Given that, what major companies are doing, and what the world needs, it makes sense to us.”

Large O&G services companies such as Halliburton and Schlumberger spend $1 million to $2 million a day on research and development (R&D), but Deleum admits that they don’t have the ability to spend as much. .You can participate [in the technology journey]preparing for the future,” he says.

Mr. Rao, who previously served as vice president of Asia-Pacific for global oilfield services giant Halliburton, is building on the model used by National Energy Services Reunited Corporation, a seven-year-old company with a large presence in the Middle East. Point out. The company does not own the technology but provides oilfield services through partnerships.

Nevertheless, research and development costs a lot of money. Also, because of its size, shareholder approval is not required for each acquisition, although the value of a large number of similar acquisitions can be significant.

In the case of LatConnect60, the acquisition is a related party transaction as Deleum co-founder Datuk Vivekananthan MV Nathan holds 15.95% of the company’s shares. Deleum entered into an agency agreement with LatConnect60 in October 2022, appointing Deleum as the agency to promote emissions tracking products across the O&G industry in Malaysia, Indonesia, Thailand and Australia.

In that regard, Rao said LatConnect60 has conducted proofs of concept with oil companies in the region and is considering working with a carbon accounting and emissions management digital solutions provider, which recently worked with Halliburton. It also has a continuing contract with Padiberas Nasional Bhd and a contract worth approximately RM6 million annually with the Western Australian State Government.

“[LatConnect60] Although we will need to invest in new satellites, we are currently fairly self-sufficient. But if the proof of concept goes well, investors will come in,” says Rao, who sees Deleum signing at least one investment deal every year.

Deleum also conducts its own research and development in-house. The company has developed a compounded chemical that can treat sludge that produces oil as a by-product. “Last year, we were able to recover RM1 million in oil residue from our client in a court case,” he says. This also saves costs and emissions when incinerating sludge.

M&A, Indonesia’s bet

Regarding its flagship P&M division, the group is currently conducting due diligence to acquire a 70% stake in PT OSA Industries India for USD 7 million.

(33.4 million ringgit) to strengthen P&M operations in this region.

Rao said PT OSA’s business is mainly valves, which is similar in size to Dereum in Malaysia. “But PT OSA is only leveraging half of Penaga’s profits.” [Dresser Sdn Bhd, a unit of Deleum] I’m doing it,” he says. “This is a chance for high double digits.”

The revelation could also bring Deleum’s oilfield services to market, Rao said, noting the O&G industry “hasn’t caught up yet.”

The P&M division’s profit in 2023 was RM99.33 million, more than double the profit of RM48.14 million in 2022. Rao blamed this on maintenance behind schedule and a sharp backlog caused by the pandemic.

The group is also open to M&A to complete Deleum’s portfolio, which currently includes slicklines, intervention works and chemicals.

“We need six to eight more product lines to become a complete service provider company. Organic growth alone is not enough. Consolidation is also a consideration as we become a stronger service company.” he says. “The O&G industry is too fragmented. I welcome all forms of integration. Sometimes we don’t need to compete, we can cooperate.”

Mr. Rao stressed that the group has no intention of increasing its assets (such as getting into shipping operations), nor is it keen on becoming an exploration and production company that owns interests in oil fields.

O&G rebuilding is in sight

Investors are pinning on Deleum’s stock amid a combination of recovering earnings and dividends and a stable business outlook. The company’s share price has already risen 42% this year to RM1.36 per share as of last Wednesday, valuing the company at RM546.11 million. At current levels, the counter is trading around its 10-year high of RM1.68 hit in April 2014.

The group recorded a record high full-year sales of RM792 million for the financial year ended December 31, 2023 (FY2023), with net profit of RM45.74 million (11.38 sen per share). , the highest since 2014 (RM59.32 million or RM18.89 million). In that case, sen per share).

The strong performance was driven by the loss of oilfield services due to legacy contracts currently in place and the loss of Integrated Corrosion Solutions (ICS) due to the lack of new contracts during the previous Petroleum Nacional S.A. (Petronas) license suspension period. Nevertheless, it was.

The full-year dividend per share was 22.89 million ringgit (5.7 sen), the highest since 2014 when it paid 7.5 sen.

Based on the share price of RM1.36 as of April 17, the group has a dividend yield of 4.19% and a forward price/earnings ratio (PER) of 10.46 times, compared to oil well services peers such as Uzma BHD (8.2 times). did. support services companies such as Dayang Enterprise Holdings Bhd (10.6x);

As at end-December, Deleum had net cash of RM213.47 million, almost 40% of its market capitalization of RM546.11 million.

“We will continue to meet the expectations of our shareholders in terms of dividends. We can safely say that this is the worst case scenario for ICS. [in 2024] The break-even point is [while] We are confident that we can make money in oil field services,” Rao said.

Deleum is bidding for contracts worth RM500 million and aims to secure two anchor long-term contracts for the ICS sector. The tender includes pan-Malaysian maintenance, construction and renovation, with the previous tender running from 2018 to 2023, with an extension until the end of 2024.

Additionally, Deleum will set up a warehouse in Pengerang, Johor to accommodate the Petronas-led integrated downstream complex. Mr Rao added that new upstream production jobs in Malaysia will be plentiful following a strong pipeline of exploration results in recent years. The group is incorporated in Sarawak and operates in Sabah and Sarawak.

“i can see [that] The O&G industry is going to be busy in the coming years,” he says. “[The industry upcycle] Even after a year, it will continue for another five years. This is a cyclical business. ”

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