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Deleum sees ‘lower for longer’ oil price
Ho Chung Teng 
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The five contracts awarded by Petronas Carigali Sdn Bhd, a subsidiary of Petroliam Nasional Bhd (Petronas), with an expected value of RM750 mil to RM1 bil, along with the Brent crude oil price rally in recent months have revived investors’ interest in oil and gas (O&G) counters.

Deleum Bhd, which provides supporting specialised products and services to the O&G industry, particularly in the exploration and production sector, saw its share price rallying to close at RM1.09 on March 15, from a 52-week low of 75.5 sen. The counter closed at 96 sen on April 4.

Despite the improved sentiments, Deleum group MD Nan Yusri Nan Rahimy says the company remains cautiously optimistic on the O&G sector, with a “lower for longer’ view on oil price.

“The industry seems to be accepting the new mantra of ‘lower for longer’ even as oil price is on a rebound. Indeed, the sustainability remains to be seen and it is right to say the industry continues to be cautiously prudent,” Nan Yusri tells FocusM.

Similarly, Petronas CEO Wan Zulkiflee Wan Ariffin had also expressed caution on oil price recovery.

While prudence may indicate businesses are not taking sufficient risk, Nan Yusri says Deleum’s cautious stance will not only stabilise its businesses, but enable it to start looking for sustainable growth.

“Deleum’s business philosophy is to remain focused on our core areas, such as those we believe we can provide added value to the industry,” Nan Yusri adds.

He says Deleum’s priorities have always been and will continue to be business sustainability, people development, cash conservation as well as cost management.

The company, he adds, has always maintained a healthy cash reserve to hedge against any unfavourable external factors or unforeseen circumstances.

Deleum has relatively strong cash and cash equivalents, which improved to RM130.65 mil as of Dec 31, 2017, from RM129.61 mil in FY16.
 
Net cash generated from operating activities rose to RM60.15 mil from RM50.63 mil, with total borrowings of RM76.04 mil versus total equity of RM350.86 mil.

In its latest quarterly report, Deleum said upstream O&G activities were subdued and saw a slowdown in demand for related products and services amidst uncertainty and inherent pressure of project feasibility.

However, with oil price hovering around US$60-70 per barrel, Nan Yusri says there could still be some positive upside for the industry.

For FY18, Deleum will focus on potential growth for its core segments, with key focus areas in the downstream and geographical expansion, particularly oilfield services and integrated corrosion solution business segments, says Nan Yusri.

“To ensure sustainability moving forward, we remain focused on our core businesses, operational efficiencies and managing cash flow.”

Such sustainability, he explains, will be anchored by Deleum’s six key focus areas: human capital development, technology, international business, internal and external communication, downstream activities, as well as cost and cash management.

Nan Yusri says Deleum’s activity level picked up gradually in the past few quarters, based on continuing growth in market surveys and tendering activities for contracts which are completing their tenures, as well as for new contract requirements in the past months.

“Nevertheless, strike rates on these new contracts would be crucial in determining the group’s direction, particularly in Malaysia,” he adds.

However, economists are cautious over Brent oil price and expect another round of falling oil prices in the second half of 2018, subsequent to Saudi Aramco’s listing.

An analyst says higher US shale oil production will also affect global oil prices, which will further hamper Brent price.

In a recent report, US Department of Energy forecasts US shale oil production to surge to nearly seven million barrels a day in April, and will continue to hit new record highs.

Deleum’s FY17 net profit rose to RM32.28 mil from RM26.51 mil in the previous year despite lower revenue of RM534.06 mil versus RM608.65 mil.

The company attributes the improved results to better sales mix contributed by its power and machinery as well as oilfield service segments, despite being impacted by a one-off restructuring charge of RM4.4 mil of its rotary business and write-offs of RM1.8 mil on oilfield assets and inventories.

Despite the improving results, investors have raised some concerns over lower normalised net profit (excluding restructuring charge and write-offs).

However, Nan Yusri says Deleum shared an impairment loss made on its associate amounting to RM2.9 mil, which if added back for like-for-like comparison, the company posted higher normalised profits.

“Moreover, the results improved due to lower finance cost, better effective tax rate, which was offset by forex loss incurred in FY17 as compared with forex gain in FY16.”

Deleum was one of the five companies awarded with contracts on Sept 20 to provide maintenance, construction and modification services (MCM) for Petronas Carigali’s offshore facilities in Peninsular Malaysia.

Nan Yusri says Deleum is now at the mobilisation phase of the contract. 

“We expect to see the financial impact on Deleum’s results beginning second half of FY18 and will contribute positively to earnings in FY19.”

On the expected contribution, he explains that unlike construction-based jobs, an MCM contract depends on the build-up of the service order.

“It is a volume-based contract. It is difficult for us to put a value to a service contract. 

“Nevertheless, these matured facilities need to be maintained and upgraded accordingly to ensure their integrity and reliability,” he adds. 

This article first appeared in Focus Malaysia Issue 279.