This article first appeared in The Edge Malaysia Weekly on April 22, 2024 - April 28, 2024

IN the current oil and gas (O&G) industry upcycle, cash-rich Deleum Bhd is embarking on multiple strategies that include mergers and acquisitions (M&A), geographical expansion and investment in early stage companies to kick-start its future growth plan.

The oilfield services company is expanding its Indonesian footprint to offer its power and machinery (P&M) services to tap the country’s fast-growing downstream energy sector, as well as state-owned Pertamina’s Refinery Development Master Plan. Currently, P&M contributes 70% to the group’s top line.

The company is also taking minority stakes in companies with technologies linked to the upstream O&G sector in order to open doors to new product lines across its oilfield services segment.

“What I envision for Deleum,” says group CEO Ramanrao Abdullah in his latest interview with The Edge, “is to create a mini Halliburton, a Schlumberger, or a Baker Hughes”, referring to the giants of the global oilfield services industry.

Rao, as he is known, was appointed to his current position in July 2021 and he also sits on Deleum’s board. He has a deemed interest of 20.36% in the company. “We are looking to invest in early stage companies that develop new technologies in the O&G industry, with the view of commercialising the technologies.

“Deleum is a good dividend company with decent margins, but there was no new growth and technology infusion. Our shareholders have to see there is a future and growth for the company.”

Towards this end, Deleum recently acquired minority stakes in two companies: RM4.72 million for a 7.7% stake in LatConnect60, a company that uses satellite imaging to track emissions; and Paradigm Technology Services BV, which provides digital slickline operations that can do more work in a single run, thus making the process more efficient.

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

In his view, carbon sequestration, emissions control and energy efficiency are key areas to explore when addressing climate change. “When we look at that, at what the big boys are doing, at what the world needs, it makes sense to us.”

While the top O&G services outfits, such as like Halliburton and Schlumberger, are spending US$1 million to US$2 million a day on research and development (R&D), Deleum acknowledges that it does not have the capacity to spend as they do “but we can participate [in the technology journey], getting ready for the future”, he says.

Rao, who previously served as the Asia-Pacific vice-president of global oilfield services giant Halliburton Co, points to the model adopted by the National Energy Services Reunited Corp, a seven-year-old company with a huge footprint in the Middle East, which does not own the technology but provides oilfield services through partnerships.

Nevertheless, R&D is a costly business. And while each acquisition does not require shareholders’ approval due to its size, many similar purchases will add up to a significant level.

In the case of LatConnect60, the acquisition is a related-party transaction as Deleum co-founder Datuk Vivekananthan MV Nathan has a 15.95% stake in the company. Deleum in October 2022 inked an agency agreement with LatConnect60 to appoint Deleum as an agent to promote its emissions tracking product across the O&G industry in Malaysia, Indonesia, Thailand and Australia.

On that note, Rao says LatConnect60 has a proof of concept with a regional oil company, and recently explored collaboration with a Halliburton-linked carbon accounting and emissions management digital solutions provider. It also has an ongoing contract with Padiberas Nasional Bhd and another with the Western Australian government totalling about RM6 million a year.

“[LatConnect60] is pretty self-sufficient at this point in time, although they need investments for a new satellite. But if the proof of concept works, investors will come,” says Rao, who sees Deleum making at least one investment deal with R&D companies every year.

In-house, Deleum also takes on its own R&D. The company developed formulated chemicals that can treat sludge, with oil as a by-product. “Last year, our trial managed to get our client RM1 million in oil residue,” he says. This also saves costs and emissions from incinerating the sludge otherwise.

As for its bread-and-butter P&M segment, the group is currently undertaking due diligence to acquire a 70% stake in PT OSA Industries Indonesia for US$7 million 

(RM33.4 million) to strengthen its P&M business in the region.

PT OSA’s business, mainly in valves, is as large as Deleum’s in Malaysia, according to Rao. “However, PT OSA is only capitalising on half of what Penaga [Dresser Sdn Bhd, a unit of Deleum] is doing,” he says. “It is a high double-digit opportunity.”

The exposure could also allow it to bring Deleum’s oilfield services into the market, says Rao, pointing to how the O&G industry “is still catching up”.

In 2023, the P&M segment profit of RM99.33 million was more than double the RM48.14 million recorded in 2022. Rao attributes the jump to the backlog caused by the pandemic as maintenance fell behind schedule.

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

“We still need another six to eight product lines to become a complete service provider company. Organic growth is not enough. Consolidation is also a consideration for us to become a stronger services company,” he says. “The O&G industry is too fragmented. I’m open to any form of consolidation. Sometimes you don’t have to compete, you can collaborate.”

Rao stresses that the group has no intention to become asset-heavy (such as going into vessel operations), nor is it keen to become an exploration and production company that owns a stake in oilfields.

Investors have been nibbling at Deleum shares, amid a confluence of earnings and dividends rebound and steady activity outlook. Its share price has already risen 42% this year to RM1.36 apiece last Wednesday, valuing the company at RM546.11 million.  At the current level, the counter is trading near its 10-year high of RM1.68 in April 2014.

The group saw record full-year revenue of RM792 million for its financial year ended Dec 31, 2023 (FY2023), with a net profit of RM45.74 million or 11.38 sen per share, its best since FY2014 (RM59.32 million or 18.89 sen per share then).

The strong performance was despite losses in oilfield services due to legacy contracts which have now concluded, and integrated corrosion solutions (ICS) due to the absence of new contracts during its licence suspension by Petroliam Nasional Bhd (Petronas) previously.

Full-year dividend per share payout stood at RM22.89 million or 5.7 sen — its highest since 7.5 sen in FY2014.

Based on its share price of RM1.36 on April 17, the group had dividend yield of 4.19% and forward price-earnings ratio of 10.46 times, compared with peers in well services such as Uzma Bhd (8.2 times), as well as other support services outfits like Dayang Enterprise Holdings Bhd (10.6 times).

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

“We will continue to meet the aspirations of shareholders from the dividends perspective. Simply because I can comfortably say that for ICS, the worst case [in 2024] is break-even, [while] for oilfield services I am very confident that we will make money,” Rao says.

Deleum is tendering for more than RM500 million worth of contracts, and targets to secure two anchor long-term contracts for the ICS segment. Tenders include Pan Malaysia maintenance, construction and modification, of which the previous one lasts from 2018 to 2023 with an extension to end-2024.

Beyond that, Deleum is setting up a warehouse in Pengerang, Johor, to cater to the integrated downstream complex led by Petronas there. Works for new upstream production in Malaysia will be aplenty following a strong pipeline of exploration findings in recent years, Rao adds. The group has set up a legal entity in Sarawak to operate in Sabah and Sarawak.

“I can see [that] the O&G industry will be busy in the coming years,” he says. “[The industry upcycle] is one year old, it will go on for another five years — it’s a cyclical business.”
 

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